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EX-23.1 - CYBERDEFENDER CORP | v164235_ex23-1.htm |
As filed with the Securities and Exchange Commission
on October 30, 2009
Registration Statement No.
333-161790
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT NO. 2
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
|
$
|
2.20
|
$
|
21,397,347.40
|
$
|
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 30,
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
|
13
|
|
Market
for Common Equity and Related Shareholder Matters
|
13
|
|
Management’s
Discussion and Analysis or Plan of Operation
|
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
|
60
|
|
Description
of Securities
|
61
|
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
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
|
|
Legal
Matters and Interests of Named Experts
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68
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|
Financial
Information
|
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. We anticipate
the costs of implementing these remediation initiatives will be approximately
$200,000 to $250,000 per year in increased salaries and $50,000 to $100,000 per
year in increased legal and accounting expenses.
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, 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
|
2008
|
$
|
12,000
|
(3)
|
0
|
0
|
0
|
$
|
12,000
|
|||||||||||||
2007
|
$
|
132,000
|
(3)
|
0
|
$
|
144,401
|
0
|
$
|
276,401
|
|||||||||||||
Michael
Barrett, former
Chief
Financial Officer
|
2008
|
$
|
55,000
|
(4)
|
0
|
$
|
58,650
|
0
|
$
|
113,650
|
||||||||||||
2007
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||
Kevin
Harris, Chief
Financial
Officer
|
2008
|
$
|
13,750
|
(5)
|
0
|
$
|
24,675
|
0
|
$
|
38,425
|
||||||||||||
Igor
Barash, Chief
Information
Officer
|
2008
|
$
|
137,500
|
(6)
|
0
|
0
|
$
|
3,255
|
$
|
140,755
|
||||||||||||
2007
|
$
|
135,000
|
(6)
|
0
|
0
|
$
|
3,201
|
$
|
138,201
|
|||||||||||||
Bing
Liu, Chief Software
Architect
|
2008
|
$
|
92,000
|
(7)
|
$
|
12,000
|
$
|
14,446
|
0
|
$
|
118,446
|
|||||||||||
2007
|
$
|
70,825
|
(7)
|
0
|
0
|
0
|
$
|
70,825
|
(1) The
amounts included in the “Option Awards” column do not reflect compensation
actually received by the named executive officer but represent the compensation
cost that was recognized by us in each year presented, determined in
accordance with SFAS No. 123(R). The valuation assumptions used in
determining such amounts are described in Note 6 of our financial statements for
the fiscal years ended December 31, 2008 and 2007.
(2)As of
October 1, 2006, Mr. Guseinov’s base salary has been set, pursuant to his
employment agreement, at $225,000 per year. In addition, Mr. Guseinov shall be
entitled to participate in any company incentive bonus compensation plan;
provided, however, he may not receive more than 50% of his base salary for any
12 month period. While Mr. Guseinov’s employment agreement requires a matching
contribution to a 401(k) plan in the amount of $2,500 per month and a life
insurance policy the premium of which is no more than $3,000 per year, we have
not provided either of these benefits to him. In November 2006, in order to
conserve cash, Mr. Guseinov agreed to defer payment of one-half of his base
salary. In 2007, compensation in the amount of $107,813 was deferred and was
accrued for Mr. Guseinov’s benefit. In 2008, all deferred compensation from 2007
was paid to Mr. Guseinov. In addition, of the $112,500 accrued as a 2008 bonus,
only $41,000 was paid during 2008 and the balance of $71,500 was accrued at
December 31, 2008.
(3) Mr.
Ivankovich began providing consulting services to us on September 1, 2006. His
Consulting Agreement was amended on October 30, 2006 and pursuant to the
amendment, Mr. Ivankovich agreed to provide services to us on a half-time basis
in exchange for $11,000 per month. In October 2007, we signed another amendment
to Mr. Ivankovich’s Consulting Agreement, pursuant to which we paid him $12,000
per month for his services. Mr. Ivankovich separated from service on January 31,
2008.
(4) Mr.
Barrett provided consulting services to us as our Chief Financial Officer.
Pursuant to a Consulting Agreement, we agreed to pay Mr. Barrett $6,000 per
month for the months of February and March 2008. Beginning on April 1, 2008, Mr.
Barrett’s cash compensation was reduced to $4,000 per month. On August 6, 2008
our board of directors approved a second independent contractor agreement with
Mr. Barrett. Pursuant to the agreement, Mr. Barrett continued to provide
services to us as our Chief Financial Officer through September 30, 2008. We
agreed to pay Mr. Barrett at the rate of $6,000 per month for his services. In
exchange for this compensation, Mr. Barrett provided his services to us for 10
to 15 hours per week. On October 1, 2008, we extended Mr. Barrett’s agreement
through November 30, 2008. On December 1, 2008, we extended Mr. Barrett’s
agreement through December 15, 2008.
44
(5) Mr.
Harris rendered services to us during the 2008 fiscal year as a consultant. The
salary paid to him during the 2008 fiscal year was for the period that began on
October 1, 2008. In 2009, he was appointed Chief Financial Officer.
(6) As of
October 1, 2006, Mr. Barash agreed to reduce his base salary to $135,000 per
year. In November 2006, in order to conserve cash, Mr. Barash agreed to defer
payment of one-half of his base salary. In 2007, compensation in the amount of
$73,125 was deferred and was accrued for Mr. Barash’s benefit. In 2008, deferred
compensation of $47,462 was paid to Mr. Barash.
(7) As of
September 2006 Mr. Liu’s annual salary was set to $202,000. In November 2006, in
order to conserve cash, Mr. Liu agreed to defer payment of one-half his base
salary. Mr. Liu resigned as an employee in August 2007 and became an independent
contractor thereafter. In 2007, compensation in the amount of $63,281 was
deferred and was accrued for Mr. Liu’s benefit. In 2008, deferred compensation
of $45,163 was paid to Mr. Liu.
(8) These
amounts consist of lease and insurance payments on automobiles.
The
following table sets forth certain information concerning stock option awards
granted to our named executive officers and our directors during the last two
fiscal years from our 2005 Equity Incentive Plan and our Amended and Restated
2006 Equity Incentive Plan.
GRANTS
OF PLAN BASED AWARDS
Name
|
Grant Date
|
All Other Stock
Awards: Number of
Securities
Underlying Options
|
Exercise or Base
Price of Options
Awards, per share
|
Grant Date Fair
value of Stock and
Option Awards(1)
|
||||||||||
Michael
Barrett
|
3/31/2008
|
20,000
|
$
|
1.00
|
$
|
17,344
|
||||||||
Michael
Barrett
|
4/16/2008
|
20,000
|
$
|
1.00
|
$
|
17,269
|
||||||||
Michael
Barrett
|
8/1/2008
|
10,000
|
$
|
1.30
|
$
|
12,094
|
||||||||
Michael
Barrett
|
10/1/2008
|
10,000
|
$
|
1.00
|
$
|
10,083
|
||||||||
Michael
Barrett
|
12/1/2008
|
2,500
|
$
|
1.20
|
$
|
2,748
|
||||||||
Kevin
Harris
|
10/1/2008
|
35,000
|
$
|
1.00
|
$
|
35,319
|
(1)
|
The valuation assumptions used in
determining such amounts are described in Note 6 of our financial
statements for the fiscal years ended December 31, 2008 and
2007.
|
The
following table sets forth certain information concerning stock option awards
outstanding to our executive officers and our directors as of December 31, 2008
from our 2005 Equity Incentive Plan and our Amended and Restated 2006 Equity
Incentive Plan.
OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2008
|
OPTION AWARDS(1)
|
|||||||||||||
Name
|
Number of securities
underlying unexercised
options (#) Exercisable
|
Equity Incentive Plan
Awards: Number of
Securities underlying
unexercised unearned
options (#)
|
Option exercise
price ($)
|
Option expiration
date
|
||||||||||
Bing
Liu
|
276,107
|
-0-
|
$
|
0.0107
|
12/31/2009
|
|||||||||
Bing
Liu
|
335,777
|
-0-
|
$
|
1.00
|
12/31/2009
|
|||||||||
Bing
Liu
|
12,500
|
-0-
|
$
|
1.00
|
08/01/2018
|
|||||||||
Igor
Barash
|
6,250
|
6,250
|
$
|
1.00
|
12/11/2016
|
|||||||||
Michael
Barrett
|
20,000
|
-0-
|
$
|
1.00
|
2/1/2018
|
|||||||||
Michael
Barrett
|
20,000
|
-0-
|
$
|
1.00
|
4/1/2018
|
|||||||||
Michael
Barrett
|
10,000
|
-0-
|
$
|
1.30
|
8/1/2018
|
|||||||||
Michael
Barrett
|
10,000
|
-0-
|
$
|
1.00
|
10/1/2018
|
|||||||||
Michael
Barrett
|
2,500
|
-0-
|
$
|
1.20
|
12/1/2018
|
|||||||||
Kevin
Harris
|
20,000
|
-0-
|
$
|
1.00
|
10/1/2018
|
45
Compensation
of Directors
Directors
do not currently receive compensation for their services as directors nor are
they reimbursed for expenses incurred in attending board meetings.
Agreements
with our Named Executive Officers
The
following discussions provide only a brief description of the documents
described below. The discussions are qualified by the full text of the
agreements.
We
entered into an employment agreement with Mr. Gary Guseinov as of August 31,
2006. The term of the agreement is three years, however if the agreement is not
terminated during that period, then it will be renewed for a period of one year
until terminated pursuant to its terms. Mr. Guseinov receives compensation of
$225,000 per year and is reimbursed for business related expenses. Under the
employment agreement, we are required to match Mr. Guseinov’s monthly
contribution to our 401(k) plan up to the sum of $2,500 per month and we have
agreed to provide a term life insurance policy with coverage in the face amount
of $1,000,000, so long as the premium for any such policy does not exceed the
sum of $3,000 per year. We do not currently, and we have not in the past,
provided the 401(k) match. We also agreed to obtain officers and directors
liability insurance with coverage of not less than $1,000,000, which we obtained
in November 2007. Mr. Guseinov receives three weeks of paid vacation per year.
We are entitled to terminate Mr. Guseinov’s employment upon a change of control,
upon Mr. Guseinov’s disability or for cause. Constructive termination is defined
as a change in Mr. Guseinov’s position, authority, duties, responsibilities or
status, an adverse change in his title, any reduction in his salary with which
he does not agree (unless such reduction is concurrent with and part of a
company-wide reduction for all employees), any breach by us of a material
obligation to Mr. Guseinov under this agreement, any requirement that Mr.
Guseinov relocate to an office that is outside of Los Angeles County, California
or outside of a 30 mile radius from his home, any termination of this agreement
(other than as permitted by the agreement) and the failure of Mr. Guseinov to be
elected to the board of directors. Mr. Guseinov may terminate his employment
upon 30 days written notice to us or in the event that he is constructively
terminated. If Mr. Guseinov’s employment is terminated for any reason other than
voluntarily by him or for cause, he is entitled to receive upon termination all
accrued but unpaid salary, earned and pro rata bonus compensation, vested stock
and stock options and post termination benefits. Post termination benefits are
defined as Mr. Guseinov’s right to receive his monthly base salary in effect at
termination for a period of one year following termination and to continue to
receive coverage under our health and dental insurance program (if any) for a
period of six months following his termination. By signing the agreement, Mr.
Guseinov assigned and agreed to assign in the future, to us or to our nominees,
all intellectual property defined in the agreement as “Relevant Intellectual
Property”.
On
September 1, 2003 we entered into an employment agreement with Igor Barash, our
Chief Information Officer. Mr. Barash is an “at-will” employee and we can
terminate his employment at any time. As compensation for the services he
renders to us, Mr. Barash is paid the sum of $145,000 per year. As of October 1,
2006, Mr. Barash agreed to reduce his base salary to $135,000 per year. We
reimburse Mr. Barash for reasonable business expenses. Currently, Mr. Barash is
entitled to 17 paid days of personal time and three sick days for each 12 months
of employment.
46
On
January 3, 2005 we entered into an employment agreement with Mr. Bing Liu, our
Chief Software Architect, wherein we agreed to pay him an annual salary of
$100,000. We also issued to Mr. Liu an option to purchase 326,106 shares of our
common stock at an exercise price of $0.0107 per share. The right to purchase
the shares was originally subject to vesting conditions, such as the length of
Mr. Liu’s service and any sale of all of our assets. In December 2005 we
increased Mr. Liu’s salary to $165,000. Mr. Liu’s annual salary was increased
again in September 2006, and, until his resignation as an employee, he was paid
the sum of $202,000 per year. Pursuant to this agreement, Mr. Liu was entitled
to receive a bonus, calculated as two percent of the net revenue we earn from
any invention created by him during the course of his employment. “Net revenue”
was defined as gross receipts less direct marketing and shipping costs less
returns and discounts. Inventions created by Mr. Liu were defined as any and all
ideas, processes, trademarks, service marks, inventions, technology, computer
programs, original works of authorship, designs, formulas, discoveries, patents,
copyrights, and all improvements, rights, and claims related to the foregoing
that are conceived, developed, or reduced to practice by Mr. Liu alone or with
others that result from any work performed by him for us or in which our
equipment, supplies, facilities or trade secret information is used. This
provision survived the termination of Mr. Liu’s employment. Pursuant to this
agreement, we were required to reimburse Mr. Liu for reasonable business
expenses. Mr. Liu agreed that following termination of his employment, he would
not take any action to induce or influence any person who provides services to
us to terminate his or her employment nor would he attempt to employ any such
person within six months of the date that person’s employment with us
terminated. Mr. Liu agreed to keep secret our confidential information during
his employment and for a period of one year following the termination of his
employment. This agreement was terminated on August 30, 2007 when we entered
into an independent contractor agreement with Mr. Liu. The term of the agreement
was six months, but the agreement could be terminated by either party upon 30
days notice, or immediately if Mr. Liu failed to discharge his obligations under
the agreement. Upon execution of the agreement we paid Mr. Liu the sum of $7,500
and we agreed to pay him the sum of $4,000 per month in exchange for his
services. We agreed to reimburse Mr. Liu for expenses incurred by him in
rendering services under the agreement. We also agreed that Mr. Liu would have a
period of 24 months to exercise any vested options, that one-half of any options
remaining unvested on December 31, 2007 would vest and that the remaining
unvested options would vest in equal increments over 24 months. The agreement
further states that if we failed to pay to Mr. Liu any unpaid salary due to him
by December 31, 2007, then any unvested options would immediately vest. At the
time of this agreement, Mr. Liu had options to purchase a total of 661,884
shares of our common stock, all of which are now vested. Pursuant to the
agreement, Mr. Liu continued his duties as Chief Software Architect and agreed
to assist us with the recruiting of a Chief Technology Officer or Vice-President
of Software Development.
On March
4, 2008 we entered into a second Independent Contractor Agreement with Mr. Liu.
The term of the agreement was five months, but the agreement could be terminated
by either party upon 30 days notice, or immediately if Mr. Liu failed to
discharge his obligations under the agreement. We agreed to pay Mr. Liu the sum
of $8,000 per month in exchange for his services and we agreed to reimburse Mr.
Liu for expenses incurred by him in rendering services under the
agreement.
On August
1, 2008 we entered into a third Independent Contractor Agreement with Mr. Liu.
The term of the agreement was five months, but the agreement could be terminated
by either party upon 30 days notice, or immediately if Mr. Liu failed to
discharge his obligations under the agreement. We agreed to pay Mr. Liu the sum
of $8,000 per month for the month of August and $9,000 per month for the
remaining term of the agreement in exchange for his services. In addition, Mr.
Liu was granted a 10-year option to purchase a total of 12,500 shares of common
stock at an exercise price of $1.00 per share vesting over the term of the
agreement. We agreed to reimburse Mr. Liu for expenses incurred by him in
rendering services under the agreement.
On
January 1, 2009, we entered into an Independent Contractor Agreement with
Unionway International, LLC, an entity controlled by Mr. Bing Liu, for
consulting services. The term of the agreement was three months. The agreement
provided compensation of $9,000 for January 2009 and $4,500 per month for each
of February and March 2009. In addition, Mr. Liu was granted a 10-year option to
purchase a total of 18,000 shares of common stock at an exercise price of $1.00
per share as a one-time bonus related to 2008 achievements. Mr Liu was also
granted a 10-year option to purchase a total of 5,000 shares of common stock at
an exercise price of $1.00 per share vesting over the term of the agreement.
During the term of the agreement, Mr. Liu was paid a one-time bonus of $18,000
related to 2008 achievements.
On April
1, 2009, we entered into a second Independent Contractor Agreement with Unionway
International, LLC for consulting services. The term of the agreement was three
months. The agreement provided compensation of $12,000 per month. In addition,
for each month that the agreement remained in force Mr. Liu was granted a
10-year option to purchase 5,000 shares of common stock at an exercise price of
$1.25 per share vesting over twenty-four months.
On
September 1, 2006 Mr. Ivan Ivankovich signed an independent contractor agreement
with us for part-time financial management and reporting services. The term of
the agreement was 90 days. We were entitled to terminate the agreement at any
time by giving Mr. Ivankovich 10 days written notice of termination or, upon a
breach of the agreement, immediately by giving written notice to Mr. Ivankovich.
Mr. Ivankovich was entitled to terminate the agreement by giving us 30 days
written notice of termination. Pursuant to this agreement, Mr. Ivankovich
received compensation in the amount of $8,000 per month through October 15,
2006. The agreement was amended on October 15, 2006, January 12, 2007, April 24,
2007 and October 22, 2007. Pursuant to the amendment dated April 24, 2007, Mr.
Ivankovich’s salary was set at $9,000 per month through June 30, 2007, and on
July 1, 2007 Mr. Ivankovich’s salary was increased to $12,000 per month. By
signing the amendment dated October 22, 2007, we extended the term of the
Independent Contractor Agreement through January 31, 2008. We also agreed to
grant Mr. Ivankovich options to purchase 40,000 shares of our common stock. The
right to purchase the common stock vested in equal increments through January
31, 2008 with the right to purchase an initial 10,000 shares vesting as of
October 1, 2007. In exchange for this compensation, Mr. Ivankovich provided
services to us for at least 20 hours per week. The agreement expired on January
31, 2008 without renewal. Mr. Ivankovich no longer provides services to
us.
47
On
February 4, 2008 our board of directors approved an independent contractor
agreement with Mr. Michael Barrett. The term of the agreement was six months.
Pursuant to the agreement, Mr. Barrett provided consulting services to us as our
Chief Financial Officer. We agreed to pay Mr. Barrett the sum of $6,000 per
month for the months of February and March 2008. Beginning on April 1, 2008, Mr.
Barrett’s cash compensation was reduced to $4,000 per month. We also issued to
Mr. Barrett an option to purchase 20,000 shares of our common stock. The right
to purchase 10,000 shares vested on April 30, 2008. The right to purchase the
remaining 10,000 shares of common stock vested at the end of the term. On April
16, 2008, we granted to Mr. Barrett an option to purchase 20,000 shares of
common stock under the 2006 Plan, at a price of $1.00 per share. On August 6,
2008 our board of directors approved a second independent contractor agreement
with Mr. Barrett. Pursuant to the agreement, Mr. Barrett continued to provide
services to us as our Chief Financial Officer through September 30, 2008. We
agreed to pay Mr. Barrett at the rate of $6,000 per month for his services. We
also agreed to grant to Mr. Barrett options to purchase 10,000 shares of our
common stock. The right to purchase the common stock vested in equal increments
of 5,000 shares per month over the term of the contract. In exchange for this
compensation, Mr. Barrett provided his services to us for 10 to 15 hours per
week. On October 1, 2008, we extended Mr. Barrett’s agreement through November
30, 2008 and we granted to Mr. Barrett an option to purchase 10,000 shares of
common stock under the 2006 Plan, at a price of $1.00 per share. On December 1,
2008, we extended Mr. Barrett’s agreement through December 15, 2008 and granted
to Mr. Barrett an option to purchase 2,500 shares of common stock under the 2006
Plan, at a price of $1.00 per share. The fair value for the option grants were
estimated at the date of grant using a Black-Scholes option pricing model, as
more fully described in Note 6 of our financial statements for the fiscal year
ended December 31, 2008.
During a
transition period from October 1, 2008 until his appointment as our Chief
Financial Officer, Mr. Kevin Harris served as a financial consultant to us,
assisting Mr. Barrett, our former Chief Financial Officer. In addition to paying
Mr. Harris $13,750 in cash compensation for his consulting services during this
transition period, we granted Mr. Harris a 10-year option to purchase a total of
20,000 shares of our common stock at an exercise price of $1.00 per
share.
On March
24, 2009 our board of directors approved an employment agreement with Mr.
Harris. Pursuant to the employment agreement, Mr. Harris will provide services
to us as our Chief Financial Officer through December 31, 2010, unless the
employment agreement is terminated earlier pursuant to its terms. We will pay
Mr. Harris annual compensation at the rate of $190,000 per year for his
services. We also agreed to grant to Mr. Harris 10-year options to purchase
300,000 shares of our common stock, as described below.
The right
to purchase 200,000 shares of common stock will vest as follows: (i) the right
to purchase 25,000 shares of common stock vested immediately upon execution of
the employment agreement; (ii) the right to purchase 25,000 shares of common
stock vested on April 1, 2009; and the right to purchase the remaining 150,000
shares of common stock will vest in equal increments of 6,250 shares of common
stock per month over a period of 24 months, starting with the effective date of
the employment agreement which is January 1, 2009. The exercise price is $1.00
per share.
We have
also provided quarterly performance goals to be met by Mr. Harris during the
2009 fiscal year. If he is successful in meeting these goals, he will be able to
earn a quarterly bonus consisting of $11,875 in cash and an option to purchase
an additional 25,000 shares of common stock. This option has an exercise price
of $1.00 per share. The right to purchase the shares will vest in equal
increments over a period of 24 months.
The
performance goals to be met by Mr. Harris during the 2010 fiscal year will be
agreed to by us and Mr. Harris on or about January 1, 2010.
We have
also agreed to pay for health and dental insurance for Mr. Harris and his family
and to provide him with an automobile allowance of $750 per month. Mr. Harris
will also receive 4 weeks paid vacation.
48
Mr.
Harris may terminate his employment upon giving us 30 days written notice of his
termination. We may terminate Mr. Harris’ employment for cause, in the event
that a disability (as defined in the employment agreement) renders him unable to
provide services to us and as a result of a Change of Control (as defined in the
employment agreement). Mr. Harris’ employment may also be terminated as a result
of a “Constructive Termination” (as defined in the employment agreement). If his
employment is terminated as a result of a disability or Change of Control, or if
we terminate his employment in our discretion but without cause, Mr. Harris will
receive his monthly base salary for the lesser of 6 months or the remaining term
of the employment agreement and we will continue to pay the premiums for his
health and dental insurance for a period of 6 months (the “Post-Termination
Benefits”). If Mr. Harris’ employment is terminated as a result of a
Constructive Termination that occurs on or after July 1, 2009, all stock option
grants and conditional grants (such as the grant made in conjunction with the
performance goals) will vest and Mr. Harris will receive the Post Termination
Benefits. If Mr. Harris’ employment is terminated as a result of a Constructive
Termination that occurs prior to July 1, 2009, he will be entitled to receive 3
months salary as a severance benefit. If Mr. Harris’ employment is terminated as
a result of a Change of Control, aside from the Post-Termination Benefits, all
stock option grants and conditional grants will vest. In the event of
termination for any reason, Mr. Harris will also be entitled to receive his
accrued but unpaid salary, earned bonus compensation, vested stock options and
vested benefits, such as accrued vacation pay.
Certain
Relationships and Related Transactions
Using the
definition of “independent” as that term is defined under the rules of the
NASDAQ Capital Market, we have determined that none of our directors will
qualify as an independent director.
Described
below are certain transactions or series of transactions between us and our
executive officers, directors and the beneficial owners of 5% or more of our
common stock, on an as converted basis, and certain persons affiliated with or
related to these persons, including family members, in which they had or will
have a direct or indirect material interest in an amount that exceeds the lesser
of $120,000 or 1% of the average of our total assets as of year-end for the last
two completed fiscal years, other than compensation arrangements that are
otherwise required to be described under “Executive Compensation.”
On
October 30, 2006 we entered into Indemnification Agreements with Mr. Guseinov,
Mr. Ivankovich, Mr. Liu and Mr. Barash, on November 6, 2007 we entered into an
Indemnification Agreement with Mr. John LaValle, a former director, on February
1, 2008 we entered into an Indemnification Agreement with Mr. Barrett, our
former Chief Financial Officer, on March 24, 2009 we entered into an
Indemnification Agreement with Kevin Harris, our current Chief Financial Officer
and a director and on July 21, 2009, we entered into an Indemnification
Agreement with Mr. Van De Bunt, a director, all of whom are sometimes
collectively referred to in this discussion as the “indemnified parties” or
individually referred to as an “indemnified party”. The agreements require us to
provide indemnification for the indemnified parties for expenses (including
attorneys’ fees, expert fees, other professional fees and court costs, and fees
and expenses incurred in connection with any appeals), judgments (including
punitive and exemplary damages), penalties, fines and amounts paid in settlement
(if such settlement is approved in advance by us, which approval shall not be
unreasonably withheld) actually and reasonably incurred by the indemnified
parties in connection with any threatened, pending or completed action or
proceeding (including actions brought on our behalf, such as shareholder
derivative actions), whether civil, criminal, administrative or investigative,
to which he is or was a party, a witness or other participant (or is threatened
to be made a party, a witness or other participant) by reason of the fact that
he is or was a director, officer, employee or agent of ours or of any of our
subsidiaries. The indemnification covers any action or inaction on the part of
the indemnified party while he was an officer or director or by reason of the
fact that he is or was serving at our request as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise. We must advance the costs of the fees and expenses within 20 days
following the delivery of a written request from an indemnified party (except
with respect to Mr. Van De Bunt’s Indemnification Agreement, which requires us
to advance fees and expenses within 5 days following delivery of a written
request from Mr. Van De Bunt). The indemnified parties have agreed to promptly
repay the advances only if, and to the extent that, it is ultimately determined
by the court (as to which all rights of appeal therefrom have been exhausted or
lapsed) that the indemnified party is not entitled to the indemnity. The
indemnified parties’ obligations to repay us for any such amounts are unsecured
and no interest will be charged thereon. We also agreed to indemnify the
indemnified parties to the fullest extent permitted by law, notwithstanding that
such indemnification is not specifically authorized by the other provisions of
the Indemnification Agreements, our articles of incorporation, our bylaws or by
statute. In the event of any change, after the date of the Indemnification
Agreements, in any applicable law, statute or rule which expands the right of a
California corporation to indemnify a member of its board of directors or an
officer, such changes shall be within the purview of the indemnified parties’
rights and our obligations under the Indemnification Agreements. In the event of
any change in any applicable law, statute or rule which narrows the right of a
California corporation to indemnify a member of its board of directors or an
officer, such changes, to the extent not otherwise required by such law, statute
or rule to be applied to the Indemnification Agreements will have no effect on
the rights and obligations of the indemnified parties and the company under
them. The indemnification provided by the Indemnification Agreements
is not exclusive of any rights to which the indemnified parties may be entitled
under our articles of incorporation, bylaws, any agreement, any vote of
shareholders or disinterested directors or the California Corporations
Code. The indemnification provided under the Indemnification
Agreements continues for any action taken or not taken while an indemnified
party serves in an indemnified capacity, even though he may have ceased to serve
in such capacity at the time of any action or other covered
proceeding. If the indemnification provided for in the
Indemnification Agreement is unavailable to an indemnified party, in lieu of
indemnifying the indemnified party we will contribute to the amount incurred by
him, whether for judgments, fines, penalties, excise taxes, amounts paid or to
be paid in settlement and/or for expenses, in connection with any claim relating
to an indemnifiable event, in such proportion as is deemed fair and reasonable
by the court before which the action was brought. We are not
obligated to provide indemnification pursuant to the terms of the
Indemnification Agreements
49
·
|
for any acts or omissions or
transactions from which a director may not be relieved of liability under
the California General Corporation Law; or for breach by an indemnified
party of any duty to us or our shareholders as to circumstances in which
indemnity is expressly prohibited by Section 317 of the California
General Corporation Law; or
|
·
|
with respect to proceedings or
claims initiated or brought voluntarily by an indemnified party not by way
of defense, (except with respect to proceedings or claims brought to
establish or enforce a right to indemnification) although such
indemnification may be provided if our Board of Directors has approved the
initiation or bringing of such proceeding or claim;
or
|
·
|
with respect to any proceeding
instituted by the indemnified party to enforce or interpret the
Indemnification Agreement, if a court of competent jurisdiction determines
that each of the material assertions made by the indemnified party in such
proceeding was not made in good faith or was frivolous;
or
|
·
|
for expenses or liabilities of
any type whatsoever which have been paid directly to an indemnified party
by an insurance carrier under a policy of directors’ and officers’
liability insurance maintained by us;
or
|
·
|
for expenses and the payment of
profits arising from the purchase and sale by an indemnified party of
securities in violation of Section 16(b) of the Securities Exchange
Act of 1934, as amended, or any similar successor
statute.
|
The
Indemnification Agreements are effective as of the date they were signed and may
apply to acts or omissions of the indemnified parties which occurred prior to
such date if the indemnified party was an officer, director, employee or other
agent of our company, or was serving at our request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, at the time such act or omission occurred. All of
obligations under the Indemnification Agreements will continue as long as an
indemnified party is subject to any actual or possible matter which is the
subject of the Indemnification Agreement, notwithstanding an indemnified party’s
termination of service as an officer or director.
In
January 2007, we paid to International Equity Partners, a Nevada limited
liability company, a fee in the amount of $2,775 for use of property during a
trade show. Mr. Guseinov is the manager of International Equity
Partners.
50
In
conjunction with his agreement to render services to us, we granted options to
Mr. Ivan Ivankovich, our former consulting Chief Financial
Officer. The options were granted from our Amended and Restated 2006
Equity Incentive Plan. The options permit Mr. Ivankovich to purchase
a total of 200,000 shares of our common stock at a price of $1.00 per
share. With the exception of the right to purchase 30,000 shares,
which vested on July 19, 2007, the right to purchase the remaining shares of
common stock vested at the rate of 10,000 shares per month. The
options have terms of 10 years. The fair value for the option grants
were estimated at the date of grant using a Black-Scholes option pricing model,
as more fully described in Note 6 of our financial statements for the fiscal
years ended December 31, 2006 and 2007.
From
time-to-time, Unionway International, LLC, an entity controlled by Mr. Liu,
provides software development services to us. During the fiscal year
ended December 31, 2008, we paid Unionway International, LLC $92,000 for
software development services. We did not pay Unionway International LLC any
money during the 2007 fiscal year. Because Mr. Liu provided services to us as
our Chief Software Architect and was a director, the negotiation of the
compensation for these services was not done “at arm’s length”. However, we
believe that we receive fair value in the services provided to us by Unionway
International, LLC and that if we were to pay an independent provider for the
services, we would pay approximately the same amount per month.
On
October 1, 2007 Mr. Guseinov loaned us the sum of $28,078. The loan
did not accrue interest. We repaid the loan on November 19,
2007. No loan agreement or promissory note was signed in conjunction
with the loan.
In March
2008, Mr. Guseinov pledged 750,000 shares of his common stock to Michael and
Casey DeBaecke in exchange for a loan of $160,000 made to us. The
pledge was non-recourse to Mr. Guseinov in the event the collateral was
foreclosed upon due to our failure to pay the loan. So long as there
was no event of default in connection with the loan, Mr. Guseinov could continue
to vote the shares at any annual or special meeting of the
shareholders. The loan was due to be repaid on the earlier of two
months following execution of the loan document or two days following our
receipt of over $500,000 in new equity capital. Additionally, we
issued warrants to purchase 40,000 shares of our common stock to the
lenders. The warrants may be exercised at a price of $1.25 per share
for a period of 5 years. The loan plus accrued interest was paid in
full on July 30, 2008.
On August
19, 2008 we entered into an Amended and Restated Consent and Waiver (the “August
Agreement”) with the holders of at least 75% of the outstanding principal amount
of our 10% Secured Convertible Debentures (the “Debenture
Holders”). Pursuant to the August Agreement, the Debenture Holders
waived the requirement that we file a second registration statement (as required
by the Debentures and the Registration Rights Agreement signed in conjunction
therewith) and waived all liquidated damages that accrued after December 19,
2007 as a result of that breach. Although the Debenture Holders did
not waive the liquidated damages that accrued prior to December 19, 2007, which
totaled $194,602.68, they waived the payment of the interest accrued on the
liquidated damages. The August Agreement allowed us to pay the
liquidated damages, as well as the interest accrued on the Debentures which was
to be paid on January 1, 2008, with our securities. Each holder was
permitted to choose to accept either shares of our common stock having an agreed
upon value of $0.85, or a debenture as payment. The debenture accrues
interest at the rate of 10% per annum, has a maturity date 18 months from the
date of issuance, and may be converted to common stock at the rate of $0.85 per
share.
On
September 22, 2008 we entered into another Amended and Restated Consent and
Waiver (the “September Agreement”) with the Debenture Holders. The
September Agreement allowed us to pay the interest accrued on the Debentures,
which was to be paid on April 1, July 1 and October 1, 2008 as well as accrued
late fees with our securities. Each holder of a Debenture was
permitted to choose to accept either shares of our common stock having an agreed
upon value of $0.85 or a debenture. The debenture accrues interest at
the rate of 10% per annum, has a maturity date 18 months from the date of
issuance, and may be converted to common stock at the rate of $0.85 per
share.
On
November 21, 2008, we entered into another Amended and Restated Consent and
Waiver (the “November Agreement”) with the Debenture Holders. The
November Agreement allowed us to sell up to $1,200,000 in aggregate principal
amount of our 10% Convertible Promissory Notes, due eleven months from the date
of issuance and convertible into shares of common stock at a conversion price of
$1.25 per share. In consideration of the Waiver and the consent provided by the
holders, we agreed to accelerate the maturity date of the 18 month 10%
convertible debentures to September 12, 2009 and we agreed and acknowledged that
the 2006 Warrant Shares and the shares of common stock underlying the 18 month
10% convertible debentures issued or issuable to each of the holders in payment
of interest and liquidated damages pursuant to prior consent and waiver
agreements shall carry “piggyback” registration rights.
51
On April
23, 2009, we entered into another Consent and Waiver agreement whereby the
Debenture Holders allowed us to sell up to $300,000 in aggregate principal
amount of 10% Convertible Promissory Notes, due five months from the date of
issuance and convertible into shares of common stock at a conversion price of
$1.75 per share.
Following
is a description of our transactions with GR Match, LLC (“GRM”), a subsidiary of
Guthy-Renker Partners, Inc. As a result of these transactions, GRM is
the beneficial owner of more than 5% of our voting securities, as calculated in
accordance with Rule 13d-3(d)(1) of the Securities Exchange Act of
1934.
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, non-forfeitable 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
Media and Marketing Services Agreement with GRM as described below, and amended
this warrant.
Pursuant
to the Media and Marketing Services 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 agreed to amend the
warrant described above so that the terms were consistent with the warrants GRM
received in conjunction with the Media and Marketing Services
Agreement. In conjunction with the execution of the Media and
Marketing Services Agreement and for creating, financing, producing, testing and
evaluating a television commercial to market our products, we issued to GRM a
second 5 year warrant for the purchase of 1,000,000 shares of our common stock
at a price of $1.25 per share. This warrant may be exercised only for
cash. Finally, we issued to GRM a 5 year warrant for the purchase of 8,000,000
shares of our common stock at an exercise price of $1.25 per share. This warrant
may be exercised only with cash. This warrant is 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
had 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 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 third warrant will
immediately vest. 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.
On June
4, 2009, we consummated a sale to GRM of 1,142,860 shares of common stock for an
aggregate purchase price of $2,000,005, of which $400,000 must be used for the
creation and production by GRM of television commercials advertising our
products and services, and the balance of which we will use for general working
capital. Pursuant to the terms of the Securities Purchase Agreement
documenting the transaction, GRM has demand and piggyback registration rights
with respect to the shares purchased. Also, in the event we sell or
issue shares of our common stock or common stock equivalents at a price per
share below $1.75 during the ninety days following the consummation of the
purchase, except for certain exempt issuances, GRM will receive additional
shares of common stock in order to effectively re-price the shares of common
stock purchased at such lower price.
In April,
2009 we obtained a $10,000,000 key man insurance policy insuring Mr. Guseinov’s
life. In the event of Mr. Guseinov’s death, 80% of the proceeds would
be paid to us and the remaining 20% of the proceeds would be paid to Mr.
Guseinov’s spouse. The annual premium for the policy is
$10,850.
Selling
Shareholders
The
following table sets forth the names of the selling shareholders who may sell
their shares under this prospectus from time to time. No selling
shareholder has, or within the past three years has had, any position, office or
other material relationship with us or any of our predecessors or affiliates
other than as a result of the ownership of our securities, except for GR Match
LLC, which is the beneficial owner of 3,978,155 shares of our common stock, or
approximately 15.1% of our common stock. Our business relationship
with GR Match LLC is described in detail in the section of this prospectus
titled “Certain Relationships and Related Transactions”.
52
The
following table also provides certain information with respect to the selling
shareholders’ ownership of our securities as of August 31, 2009, the total
number of securities they may sell under this prospectus from time to time, and
the number of securities they will own thereafter assuming no other acquisitions
or dispositions of our securities. The selling shareholders can offer
all, some or none of their securities, thus we have no way of determining the
number they will hold after this offering. Therefore, we have
prepared the table below on the assumption that the selling shareholders will
sell all shares covered by this prospectus.
Some of
the selling shareholders may distribute their shares, from time to time, to
their limited and/or general partners or managers, who may sell shares pursuant
to this prospectus. Each selling shareholder may also transfer shares
owned by him or her by gift, and upon any such transfer the donee would have the
same right of sale as the selling shareholder.
The
shares described in the following table consist of shares of common stock,
shares of common stock underlying our 10% Convertible Promissory Notes and our
10% Convertible Debentures and shares of common stock underlying common stock
purchase warrants that were issued in a private placement or issued to
consultants. A discussion of the material terms of this offering is
included in the section of this prospectus titled “Prospectus Summary - The
Offering” at page 2. We may amend or supplement this prospectus from
time to time to update the disclosure set forth herein, however, if a selling
shareholder transfers his or her interest in the common stock purchase warrants
prior to the effective date of the registration statement of which this
prospectus is a part, we will be required to file a post-effective amendment to
the registration statement to provide the information concerning the
transferee. Alternatively, if a selling shareholder transfers his or
her interest in the common stock purchase warrants after the effective date of
the registration statement of which this prospectus is a part, we may use a
supplement to update this prospectus. None of the selling
shareholders are or were affiliated with registered
broker-dealers. See our discussion titled “Plan of Distribution” for
further information regarding the selling shareholders’ method of distribution
of these shares.
Name of Selling
Shareholder
|
Number of Shares
Owned Before
Offering
|
Number of
Shares Being
Offered
|
Number of Shares
Owned After
Offering(1)
|
Percentage
Owned After
Offering(1)
|
||||||||||||
Nancy
R. McBride
|
62,000
|
22,000
|
(2)
|
40,000
|
*
|
|||||||||||
IRA
FBO Terrence Rettig, Pershing LLC as custodian
|
364,876
|
60,000
|
(3)
|
304,876
|
1.0
|
%
|
||||||||||
Alan
P. Schwenck and Marta A. Schwenck
|
82,625
|
42,625
|
(4)
|
40,000
|
*
|
|||||||||||
James
N. Angelos and Sophia Angelos
|
124,000
|
44,000
|
(5)
|
80,000
|
*
|
|||||||||||
IRA
FBO Ruth H. Reinhard, Pershing LLC as Custodian
|
158,773
|
55,916
|
(6)
|
102,857
|
*
|
|||||||||||
IRA
FBO Patrick Shannon, Pershing LLC as Custodian
|
24,000
|
8,000
|
(7)
|
16,000
|
*
|
|||||||||||
Citigroup
Global Markets Inc. as IRA Custodian FBO Hugh G. Nolan
|
120,000
|
40,000
|
(8)
|
80,000
|
*
|
|||||||||||
Michael
B. Schachter
|
76,625
|
31,625
|
(9)
|
45,000
|
*
|
|||||||||||
Ricardo
A. Salas
|
432,772
|
266,650
|
(10)
|
166,122
|
*
|
|||||||||||
Lisa
Schachter
|
31,000
|
11,000
|
(11)
|
20,000
|
*
|
|||||||||||
IRA
FBO Barbara K. Balfour, Pershing LLC as Custodian
|
95,375
|
31,625
|
(12)
|
63,750
|
*
|
|||||||||||
Michael
R. DeBaecke
|
188,313
|
150,175
|
(13)
|
38,138
|
*
|
|||||||||||
Edward
T. Fletcher
|
107,625
|
42,625
|
(14)
|
65,000
|
*
|
|||||||||||
Diana
Conforth
|
76,625
|
31,625
|
(15)
|
45,000
|
*
|
|||||||||||
Sophia
Gazonas
|
30,000
|
10,000
|
(16)
|
20,000
|
*
|
|||||||||||
Sandra
Dinapoli
|
73,750
|
10,000
|
(17)
|
63,750
|
*
|
53
Raymond
Marzulli
|
192,200
|
68,200
|
(18)
|
124,000
|
*
|
|||||||||||
Anthony
A. Stingo and Anita M. Stingo
|
30,000
|
10,000
|
(19)
|
20,000
|
*
|
|||||||||||
James
McBride III
|
244,500
|
104,500
|
(20)
|
140,000
|
*
|
|||||||||||
IRA
FBO William J. Gazonas, Pershing LLC as Custodian
|
82,286
|
22,000
|
(21)
|
60,286
|
*
|
|||||||||||
V.
Jean Stack
|
171,500
|
71,500
|
(22)
|
100,000
|
*
|
|||||||||||
Shimski
L.P.
|
632,500
|
632,500
|
(23)
|
*
|
||||||||||||
Newview
Finance LLC
|
1,860,000
|
1,860,000
|
(24)
|
*
|
||||||||||||
Michael
Ling
|
419,018
|
419,018
|
(25)
|
*
|
||||||||||||
Dave
Mehalick
|
50,000
|
50,000
|
(26)
|
*
|
||||||||||||
David
Kagle
|
25,000
|
25,000
|
(27)
|
*
|
||||||||||||
Ken
Donenfeld
|
30,000
|
15,000
|
(28)
|
15,000
|
*
|
|||||||||||
GR
Match, LLC (31)
|
3,978,155
|
3,529,081
|
(29)
|
449,074
|
1.5%
|
|||||||||||
Donald
A & Findley R Cotton TR U/A 8/19/02(32)
|
8,000
|
8,000
|
(30)
|
*
|
||||||||||||
Thomas
W. Brotherton Rev Trust U/A 5/29/08(33)
|
25,000
|
25,000
|
(30)
|
*
|
||||||||||||
La
Jolla Knoll LTD Partnership(34)
|
10,000
|
10,000
|
(30)
|
*
|
||||||||||||
Marz
Family Trust U/A 12/8/99(35)
|
5,000
|
5,000
|
(30)
|
*
|
||||||||||||
The
Salem Trust U/A 3/18/91(36)
|
7,000
|
7,000
|
(30)
|
*
|
||||||||||||
Schmidt
Marital Trust U/A 3/4/87(37)
|
20,000
|
20,000
|
(30)
|
*
|
||||||||||||
Fields
Family Trust U/A 4/29/96(38)
|
4,000
|
4,000
|
(30)
|
*
|
||||||||||||
Don
& Lynn Sturek Family Trust U/A 8/15/00(39)
|
4,000
|
4,000
|
(30)
|
*
|
||||||||||||
Michelle
L. Levin Trust U/A 05/04/06(40)
|
10,000
|
10,000
|
(30)
|
*
|
||||||||||||
The
O'Rourke-Nordenberg Living Trust U/A 11/09/05(41)
|
5,000
|
5,000
|
(30)
|
*
|
||||||||||||
Robert
P. Ketterer 2005 Trust U/A 05/2/05(42)
|
8,000
|
8,000
|
(30)
|
*
|
||||||||||||
R&R
Properties LP A Partnership(43)
|
5,000
|
5,000
|
(30)
|
*
|
||||||||||||
Harrison
and Kaye Waite
|
1,000
|
1,000
|
(30)
|
*
|
||||||||||||
Edward
G. Jablonski and Carol A. Morgan
|
4,500
|
4,500
|
(30)
|
*
|
||||||||||||
Margaret
Celeste Waterhouse Family LP(44)
|
4,000
|
4,000
|
(30)
|
*
|
||||||||||||
National
Advisors Trust Co, FSB Custodian for Weatherly Asset Management Profit
Sharing Plan(90)
|
1,000
|
1,000
|
(30)
|
*
|
||||||||||||
Hugh
G. Merriman MD Trust(45)
|
4,000
|
4,000
|
(30)
|
*
|
||||||||||||
Kolodny-Dudenhoeffer
Trust U/A 5/25/93(46)
|
4,000
|
4,000
|
(30)
|
*
|
||||||||||||
Betty
W Keatinge Trust U/A 11/18/93(47)
|
2,000
|
2,000
|
(30)
|
*
|
||||||||||||
Dugan-Keatinge
Family Trust U/A 5/22/00(48)
|
500
|
500
|
(30)
|
*
|
||||||||||||
Marvin
Brown
|
500
|
500
|
(30)
|
*
|
54
Kristin
L Wimsatt Trust U/A 5/1/08(49)
|
30,000
|
30,000
|
(30)
|
*
|
||||||||||||
Alice
W. Brown
|
2,500
|
2,500
|
(30)
|
*
|
||||||||||||
Rita
B. Heller
|
15,000
|
15,000
|
(30)
|
*
|
||||||||||||
Syage-Whittington
Revocable Trust U/A 7/28/97(50)
|
6,000
|
6,000
|
(30)
|
*
|
||||||||||||
Scott
& Michelle Strauss Rev Trust U/A 4/18/08(51)
|
3,000
|
3,000
|
(30)
|
*
|
||||||||||||
Weil
Family Trust U/A 4/8/87(52)
|
10,000
|
10,000
|
(30)
|
*
|
||||||||||||
Halper
Family Trust U/A 9/14/99 FBO: Stephen I.H. Sole & Separate
Property(53)
|
1,000
|
1,000
|
(30)
|
*
|
||||||||||||
James
Bruder Jr.
|
77,789
|
52,789
|
(54)
|
25,000
|
*
|
|||||||||||
Walter
W. Buckley III
|
201,226
|
110,000
|
(55)
|
91,226
|
*
|
|||||||||||
CCM,
Inc.
|
87,774
|
55,000
|
(56)
|
32,774
|
*
|
|||||||||||
Willam
J. Santora
|
180,982
|
110,000
|
(57)
|
70,982
|
*
|
|||||||||||
Michael
& Casey Debaecke
|
82,575
|
82,575
|
(58)
|
*
|
||||||||||||
SEP
FBO Heidi Ann Mucci, Pershing LLC as Custodian
|
45,625
|
20,625
|
(59)
|
25,000
|
*
|
|||||||||||
William
F. Holsten III
|
38,642
|
26,142
|
(60)
|
12,500
|
*
|
|||||||||||
CCM
Partners Fund LP
|
11,369
|
11,369
|
(61)
|
*
|
||||||||||||
Christopher
J. Preston
|
39,015
|
26,515
|
(62)
|
12,500
|
*
|
|||||||||||
Geoffrey
Blake
|
27,375
|
12,375
|
(63)
|
15,000
|
*
|
|||||||||||
Daniel
& Barbara Maase
|
45,625
|
20,625
|
(64)
|
25,000
|
*
|
|||||||||||
Leo
Carlin
|
27,500
|
27,500
|
(65)
|
*
|
||||||||||||
Charles
Lipton
|
45,625
|
20,625
|
(66)
|
25,000
|
*
|
|||||||||||
Robert
G. Zimmermann
|
45,625
|
20,625
|
(67)
|
25,000
|
*
|
|||||||||||
William
Gazonas TTEE for U/W/O James J. Gazonas Trust B
|
12,500
|
11,459
|
(68)
|
1,041
|
*
|
|||||||||||
William
J. Gazonas
|
52,416
|
11,457
|
(69)
|
40,959
|
*
|
|||||||||||
Zonas
Investors L.P., William Gazonas G.P.
|
22,916
|
22,916
|
(70)
|
*
|
||||||||||||
Connie
Gazonas TTEE, Connie Gazonas Trust Dated 08/29/96
|
11,459
|
11,459
|
(71)
|
*
|
||||||||||||
Michael
F. Valente
|
80,207
|
80,207
|
(72)
|
*
|
||||||||||||
IRA
FBO Bernadette Sheenan, Pershing LLC as custodian
|
45,625
|
20,625
|
(73)
|
25,000
|
*
|
|||||||||||
Robert
Goggin
|
463,338
|
287,891
|
(74)
|
175,447
|
*
|
|||||||||||
Ruth
H Reinhard
|
58,237
|
58,237
|
(75)
|
*
|
||||||||||||
The
1991 Sajak Family Trust
|
57,291
|
57,291
|
(76)
|
*
|
||||||||||||
James
D. Watson
|
137,180
|
41,554
|
(77)
|
95,626
|
*
|
|||||||||||
James
D. & Pamela Watson
|
75,227
|
75,227
|
(78)
|
*
|
||||||||||||
Leslie
Stein & Judith Stein
|
29,895
|
29,895
|
(79)
|
*
|
||||||||||||
Leslie
Stein
|
27,375
|
12,375
|
(80)
|
15,000
|
*
|
|||||||||||
James
Angelos
|
45,625
|
20,625
|
(81)
|
25,000
|
*
|
|||||||||||
Brendan
Murray
|
32,290
|
11,457
|
(82)
|
20,833
|
*
|
|||||||||||
Gary
Brousell
|
45,625
|
20,625
|
(83)
|
25,000
|
*
|
|||||||||||
Robert
Odell
|
149,291
|
137,411
|
(84)
|
11,880
|
*
|
|||||||||||
Pamela
L Watson Defined Benefit Pension Plan
|
132,500
|
82,500
|
(85)
|
50,000
|
*
|
|||||||||||
Tony
Fareed
|
45,625
|
20,625
|
(86)
|
25,000
|
*
|
55
Seneco
Associates, Inc. PS Plan U/A 07/01/2003
|
45,625
|
20,625
|
(87)
|
25,000
|
*
|
|||||||||||
Brian
E. Boyle
|
188,600
|
115,088
|
(88)
|
73,512
|
*
|
|||||||||||
Garrett
Goggin
|
164,536
|
115,088
|
(89)
|
49,448
|
*
|
|||||||||||
TOTAL
|
12,843,648
|
9,726,067
|
3,117,581
|
10.6
|
%
|
*Less
than 1% based on a total of 29,493,597 shares of common stock issued and
outstanding after the offering, assuming the issuance of all shares of common
stock underlying the warrants described in this prospectus.
(1)
Assumes that all shares will be resold by the selling shareholders after this
offering.
(2)
Includes 22,000 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(3)
Includes 60,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant issued in conjunction with the sale of our 10%
Convertible Promissory Note issued beginning on November 25, 2008.
(4)
Includes 42,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(5)
Includes 13,200 shares of common stock issued and 30,800 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(6)
Includes 50,833 shares of common stock issued and 5,083 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17,
2009. Voting and investment power over these securities is held by
the beneficiary, Ruth H. Reinhard.
(7)
Includes 8,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant issued in conjunction with the sale of our 10%
Convertible Promissory Note issued beginning on November 25,
2008. Voting and investment power over these securities
is held by the beneficiary, Patrick Shannon.
(8)
Includes 40,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant issued in conjunction with the sale of our 10%
Convertible Promissory Note issued beginning on November 25,
2008. Voting and investment power over these securities
is held by the beneficiary, Hugh G. Nolan.
(9)
Includes 9,488 shares of common stock issued and 22,137 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(10)
Includes 79,996 shares of common stock issued and 186,654 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(11)
Includes 3,300 shares of common stock issued and 7,700 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(12)
Includes 28,750 shares of common stock issued and 2,875 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17,
2009. Voting and investment power over these securities is held by
the beneficiary, Barbara K. Balfour.
(13)
Includes 140,175 shares of common stock issuable upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009 and 10,000 shares of common stock issuable upon
the exercise of a common stock purchase warrant issued in conjunction with the
sale of our 10% Convertible Promissory Note issued beginning on November 25,
2008.
(14)
Includes 42,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(15)
Includes 31,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(16)
Includes 10,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant issued in conjunction with the sale of our 10%
Convertible Promissory Note issued beginning on November 25, 2008.
(17)
Includes 10,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant issued in conjunction with the sale of our 10%
Convertible Promissory Note issued beginning on November 25, 2008.
(18)
Includes 68,200 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(19)
Includes 10,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant issued in conjunction with the sale of our 10%
Convertible Promissory Note issued beginning on November 25, 2008.
(20)
Includes 52,250 shares of common stock issued and 52,250 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(21)
Includes 20,000 shares of common stock issued and 2,000 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17,
2009. Voting and investment power over these securities is held by
the beneficiary, William J. Gazonas.
(22)
Includes 57,200 shares of common stock issued and 14,300 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(23)
Includes 632,500 shares of common stock issued pursuant to a Securities Purchase
Agreement dated June 10, 2009. Boris Shimanovsky, as managing partner of Shimski
L.P., holds dispositive and voting power over the securities.
(24)
Includes 1,860,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant issued to Newview Finance LLC on November 11, 2008 for
management consulting services, business advisory services, shareholder
information services and public relations services. Newview LLC has appointed
Brian Jacobelli, one of its members, as the person with dispositive and voting
power over the securities.
(25)
Includes 119,018 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009 and 300,000 shares of common stock issuable upon
the exercise of a common stock purchase warrant assigned from Newview Finance
LLC on June 18, 2009.
(26)
Includes 50,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant assigned from Newview Finance LLC on June 18,
2009.
(27)
Includes 25,000 shares of common stock issuable upon the exercise of a common
stock purchase warrant assigned from Newview Finance LLC on June 18,
2009.
(28)
Includes 15,000 shares of common stock issued upon the exercise of a common
stock purchase warrant assigned from Newview Finance LLC on June 18,
2009.
56
(29)
Includes 1,142,860 shares of common stock issued pursuant to a Securities
Purchase Agreement dated June 4, 2009 and 2,386,221 shares of common stock
issuable upon the exercise of common stock purchase warrants issued to GR-Match
LLC pursuant to the Media and Marketing Services Agreement, date March 24,
2009.
(30)
Includes shares of common stock issued pursuant to Securities Purchase
Agreements dated from July 7, 2009 to July 21, 2009.
(31)
Bennet Van de Bunt, as Manager of GR Match, LLC, holds dispositive and voting
power over the securities.
(32)
Donald and Findley Cotton, as trustees, hold dispositive and voting power over
the securities.
(33)
Thomas Brotherton, as trustee, holds dispositive and voting power over the
securities.
(34)
Steele Lipe, as trustee, holds dispositive and voting power over the
securities.
(35)
Daniel and Graciela Marz, as trustees, hold dispositive and voting power over
the securities.
(36)
Ronald Salem, as trustee, holds dispositive and voting power over the
securities.
(37)
James Schmidt, as trustee, holds dispositive and voting power over the
securities.
(39) Dale
and Tara Fields, as trustees, hold dispositive and voting power over the
securities.
(39) Don
and Lynn Sturek, as trustees, hold dispositive and voting power over the
securities.
(40)
Michelle Levin, as trustee, holds dispositive and voting power over the
securities.
(41)
Eugene O’Rourke and Janice Nordenberg, as trustees, hold dispositive and voting
power over the securities.
(42)
Robert Ketterer, as trustee, holds dispositive and voting power over the
securities.
(43)
Reginald Laigo, as partner. holds dispositive and voting power over the
securities.
(44)
Margaret Waterhouse, as partner, holds dispositive and voting power over the
securities.
(45) Hugh
Merriman, as trustee, holds dispositive and voting power over the
securities.
(46)
Robert Kolodny and Martha Dudenhoeffer, as trustees, hold dispositive and voting
power over the securities.
(47)
Richard Keatinge, as trustee, holds dispositive and voting power over the
securities.
(48)
Richard Keatinge and Jessica Dugan, as trustees, hold dispositive and voting
power over the securities.
(49)
Kristin Wimsatt, as trustee, holds dispositive and voting power over the
securities.
(50)
Victoria Syage and Richard Whittington, as trustees, hold dispositive and voting
power over the securities.
(51)
Scott and Michelle Strauss, as trustees, hold dispositive and voting power over
the securities.
(52)
James and Ellen Weil, as trustees, hold dispositive and voting power over the
securities.
(53)
Stephen and Laura Halper, as trustees, hold dispositive and voting power over
the securities.
(54)
Includes 52,789 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(55)
Includes 93,301 shares of common stock issued and 16,699 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(56)
Includes 50,000 shares of common stock issued and 5,000 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009. Brian
Suttcliffe, as president, holds dispositive and voting power over the
securities.
(57)
Includes 100,000 shares of common stock issued and 10,000 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(58)
Includes 82,575 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(59)
Includes 18,750 shares of common stock issued and 1,875 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17,
2009. Voting and investment power over these securities is held by
the beneficiary, Heidi Ann Mucci.
(60)
Includes 13,071 shares of common stock issued and 13,071 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(61)
Includes 11,369 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009. Chris Rossman, as general partner, holds
dispositive and voting power over the securities.
(62)
Includes 26,515 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(63)
Includes 12,375 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(64)
Includes 20,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(65)
Includes 12,500 shares of common stock issued and 15,000 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(66)
Includes 20,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(67)
Includes 20,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(68)
Includes 10,417 shares of common stock issued and 1,042 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009. William Gazonas,
as trustee, holds dispositive and voting power over the securities.
(69)
Includes 10,416 shares of common stock issued and 1,041 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(70)
Includes 20,833 shares of common stock issued and 2,083 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009. William Gazonas,
as general partner, holds dispositive and voting power over the
securities.
(71)
Includes 10,417 shares of common stock issued and 1,042 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009. Connie Gazonas,
as trustee, holds dispositive and voting power over the securities.
(72)
Includes 25,000 shares of common stock issued and 55,207 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(73)
Includes 20,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009. Voting and investment power over these
securities is held by the beneficiary, Bernadette Sheenan.
(74)
Includes 86,369 shares of common stock issued and 201,522 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
57
(75)
Includes 34,375 shares of common stock issued and 23,862 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(76)
Includes 57,291 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009. Pat Sajak, as trustee, holds dispositive and
voting power over the securities.
(77)
Includes 23,888 shares of common stock issued and 17,666 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(78)
Includes 68,388 shares of common stock issued and 6,839 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(79)
Includes 29,895 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(80)
Includes 12,375 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(81)
Includes 20,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(82)
Includes 11,457 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(83)
Includes 20,625 shares of common stock issued upon the exercise of an amended
common stock purchase warrant pursuant to our warrant tender offer that
terminated on August 17, 2009.
(84)
Includes 41,234 shares of common stock issued and 96,177 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(85)
Includes 75,000 shares of common stock issued and 7,500 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009. James Watson, as
trustee, holds dispositive and voting power over the securities.
(86)
Includes 6,188 shares of common stock issued and 14,437 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(87)
Includes 8,250 shares of common stock issued and 12,375 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009. Frank Seneco, as
trustee, holds dispositive and voting power over the securities.
(88)
Includes 34,527 shares of common stock issued and 80,561 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(89)
Includes 34,527 shares of common stock issued and 80,561 shares of common stock
issuable upon the exercise of an amended common stock purchase warrant pursuant
to our warrant tender offer that terminated on August 17, 2009.
(90) Lea
Akert, as administrator, holds dispositive and voting power over the
securities.
Plan
of Distribution
Each
selling shareholder of the common stock and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTC Bulletin Board or any other stock exchange, market or
trading facility on which the shares are traded or in private
transactions. These sales may be at fixed or negotiated
prices. A selling shareholder may use any one or more of the
following methods when selling shares:
•
|
ordinary
brokerage transactions and transactions in which the broker dealer
solicits purchasers;
|
•
|
block trades in which the broker
dealer will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction;
|
•
|
purchases
by a broker dealer as principal and resale by the broker dealer for its
account;
|
•
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
•
|
privately
negotiated transactions;
|
•
|
settlement of short sales entered
into after the effective date of the registration statement of which this
prospectus is a part;
|
•
|
broker dealers may agree with the
selling shareholders to sell a specified number of such shares at a
stipulated price per share;
|
•
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise;
|
•
|
a
combination of any such methods of sale;
or
|
•
|
any
other method permitted pursuant to applicable
law.
|
58
The
selling shareholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended, if available, rather than under this
prospectus.
Broker-dealers
engaged by the selling shareholders may arrange for other broker dealers to
participate in sales. Broker-dealers may receive commissions or
discounts from the selling shareholders (or, if any broker dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated,
but, except as set forth in a supplement to this prospectus, in the case of an
agency transaction not in excess of a customary brokerage commission in
compliance with NASDR Rule 2440, and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.
In
connection with the sale of the common stock or interests therein, the selling
shareholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
shareholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The
selling shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities that require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act of 1933, as amended, in connection with such sales. In
such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act of 1933, as
amended. We know of no existing arrangements between the
selling shareholders and any other security holder, broker, dealer, underwriter
or agent relating to the sale or distribution of our common stock.
We are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling shareholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act of 1933, as amended.
If
selling shareholders are deemed to be “underwriters” within the meaning of the
Securities Act of 1933, as amended, they will be subject to the prospectus
delivery requirements of the Securities Act of 1933, as amended, including Rule
172 thereunder. In addition, any securities covered by this
prospectus that qualify for sale pursuant to Rule 144 under the Securities Act
of 1933, as amended, may be sold under Rule 144 rather than under this
prospectus. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the selling
shareholders.
We have
signed registration rights agreements with various investors. These
agreements require us to keep the registration statement, of which this
prospectus is a part, effective for periods ranging from the earlier of (i)
the date on which the shares may be resold by the selling shareholders without
registration and without regard to any volume limitations by reason of Rule 144
under the Securities Act of 1933, as amended, or any other rule of similar
effect (ii) all of the shares have been sold pursuant to this prospectus or Rule
144 under the Securities Act of 1933, as amended, or any other rule of similar
effect or (iii) two years from the effective date. We intend to keep
the registration statement effective for the longest period required by the
registration rights agreements we have signed. The resale shares will be sold
only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under
applicable rules and regulations under the Securities Exchange Act of 1934, as
amended, any person engaged in the distribution of the resale shares may not
simultaneously engage in market making activities with respect to the common
stock for the applicable restricted period, as defined in Regulation M, prior to
the commencement of the distribution. In addition, the selling
shareholders will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder, including
Regulation M, which may limit the timing of purchases and sales of shares of the
common stock by the selling shareholders or any other person. We will
make copies of this prospectus available to the selling shareholders who are
required to deliver a copy of this prospectus to each purchaser at or prior to
the time of the sale (including by compliance with Rule 172 under the Securities
Act of 1933, as amended).
59
Security
Ownership of Certain Beneficial Owners and Management
The
following tables set forth certain information regarding beneficial ownership of
our securities as of October 9, 2009 by (i) each person who is known by us to
own beneficially more than 5% of the outstanding shares of each class of our
voting securities, (ii) each of our directors and executive officers, and (iii)
all of our directors and executive officers as a group. Unless
otherwise stated, the address of our directors and executive officers is c/o
CyberDefender Corporation, 617 West 7th Street, Suite 401, Los Angeles,
California 90017.
We have
determined beneficial ownership in accordance with the rules of the Securities
and Exchange Commission. Under these rules, beneficial ownership
generally includes voting or investment power over securities. The number of
shares shown as beneficially owned in the tables below are calculated pursuant
to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934. Under
Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned by
such person, but not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed. Except as otherwise
indicated, we believe that the beneficial owners listed below, based on the
information furnished by these owners, have sole investment and voting power
with respect to the securities indicated as beneficially owned by them, subject
to applicable community property laws. As of October 9, 2009, we had
23,596,842 shares of common stock issued and outstanding.
Name of Director, Officer and Beneficial
Owner(1)
|
Number of Shares of
Common Stock Beneficially
Owned
|
Percentage of Common
Stock
|
||||||
Named Executive Officers and
Directors:
|
||||||||
Gary
Guseinov, Chief Executive Officer and director
|
6,418,219
|
(2)
|
27.2
|
%
|
||||
Igor
Barash, Chief Information Officer, Secretary and director
|
649,055
|
(3)
|
2.7
|
%
|
||||
Bing
Liu, former Chief Software Architect and former director
|
1,504,227
|
(4)
|
6.2
|
%
|
||||
Kevin
Harris, Chief Financial Officer and director
|
110,625
|
(5)
|
*
|
|||||
Bennet
Van de Bunt, director
|
3,978,155
|
(6)
|
15.1
|
%
|
||||
GR
Match, LLC
|
3,978,155
|
(6)
|
15.1
|
%
|
||||
ITU
Ventures
|
1,819,382
|
(7)
|
7.5
|
%
|
||||
All
current officers and directors as a group (4 persons)
|
11,156,054
|
(8)
|
45.4
|
%
|
* Less
than one percent beneficially owned.
(1) The
address for each of our officers and directors is 617 West 7th Street, Suite
401, Los Angeles, California 90017.
(2) This
number includes of 229,540 shares of common stock held by Mr. Guseinov’s
family.
(3) This
number consists of 636,555 shares of common stock and an option to purchase
12,500 shares of our common stock that was granted from our 2006 Equity
Incentive Plan.
(4) This
number consists of 841,843 shares of common stock, options to purchase 314,107
shares of our common stock that were granted from our 2005 Equity Incentive Plan
and options to purchase 348,277 shares of our common stock that were granted
from our 2006 Equity Incentive Plan.
(5) Mr.
Harris received an option to purchase 10,000 shares of our common stock on
October 1, 2008 and 5,000 shares of our common stock on November 1, 2008 in
conjunction with the execution of an Independent Contractor Agreement dated
October 1, 2008. Mr. Harris received an option to purchase 5,000
shares of our common stock on December 1, 2008 in conjunction with the execution
of an Independent Contractor Agreement dated December 1, 2008. In
conjunction with the execution of an Employment Agreement dated January 1, 2009,
Mr. Harris received an option to purchase 200,000 shares of our common stock, of
which 81,250 have vested as of October 9, 2009. Pursuant to the Employment
Agreement dated January 1, 2009, Mr. Harris received an option to purchase
25,000 shares of our common stock, of which 6,250 have vested as of October 9,
2009, as a bonus on March 31, 2009 and an option to purchase 25,000 shares of
our common stock, of which 3,125 have vested as of October 9, 2009, as a bonus
on June 30, 2009 and an option to purchase 25,000 shares of our common stock, of
which none have vested as of October 9, 2009, as a bonus on September 30,
2009.
60
(6) This
number represents 1,142,860 shares of common stock issued to GR Match, LLC
pursuant to a Securities Purchase Agreement dated June 3, 2009, and 2,385,295
shares of common stock issuable upon exercise of warrants issued to GR Match,
LLC pursuant to the Media and Marketing Services Agreement dated March 24,
2009. The address of GR Match, LLC is c/o Guthy-Renker LLC, 3340
Ocean Park Boulevard, Suite 3000, Santa Monica, California 90405. Mr. Van de
Bunt is a beneficial owner of these securities, inasmuch as he is the Manager of
GR Match, LLC and the beneficiary of a trust that owns a 4.86% interest in
Guthy-Renker Partners, Inc., which owns a 94% interest in Guthy-Renker Holdings,
LLC, which is the sole owner of Guthy-Renker LLC, which owns an 80% interest in
GR Match, LLC. Mr. Van de Bunt disclaims ownership of these
securities.
(7) This
number represents 1,252,475 shares of common stock and 566,907 shares of common
stock issuable upon the exercise of a common stock purchase
warrant. The address of ITU Ventures is 13101 W. Washington
Boulevard, Suite 132, Los Angeles, California 90066.
(8) This
number includes shares beneficially owned by Mr. Van de Bunt, Manager of GR
Match, LLC, as described in note 6 above.
Description
of Securities
General
The
following discussion of our securities is qualified in its entirety by our
articles of incorporation, as amended, and our bylaws and by the full text of
the agreements pursuant to which the securities were issued. We urge
you to review these documents, copies of which have been filed with the
Securities and Exchange Commission, as well as the applicable statutes of the
State of California for a more complete description of the rights and
liabilities of holders of our securities.
Common
Stock
We are
authorized to issue only one class of stock, which is designated as common
stock. The total number of shares of common stock that we may issue
is 50,000,000, with no par value per share.
As of
October 9, 2009, we had 23,596,842 shares of common stock issued and outstanding
that were held of record by 167 shareholders.
The
holders of common stock are entitled to one vote per share on all matters to be
voted upon by the shareholders. The holders of common stock are
entitled to receive ratably any dividends that may be declared from time to time
by the board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities. The common stock has no
preemptive or conversion rights or other subscription rights. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock offered in this offering will be fully paid and not
liable for further call or assessment.
The
holders of common stock have cumulative voting rights, which means that every
shareholder entitled to vote at any election of directors may cumulate such
shareholder’s votes and give one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of votes to which the
shareholder’s shares are normally entitled, or distribute the shareholder’s
votes on the same principle among as many candidates as the shareholder thinks
fit.
Except
for directors, who are elected by receiving the highest number of affirmative
votes of the shares entitled to be voted for them, or as otherwise required by
California law, all shareholder action is taken by the vote of a majority of the
issued and outstanding shares of common stock present at a meeting of
shareholders at which a quorum consisting of a majority of the issued and
outstanding shares of common stock is present in person or proxy.
Convertible
Debentures and Promissory Notes
On
September 12, 2006, we entered into a Securities Purchase Agreement with certain
investors pursuant to which we sold 10% Secured Convertible Debentures in the
aggregate principal amount of $3,243,378. The outstanding principal
amount of our 10% Secured Convertible Debentures may be converted into our
common stock at the price of $1.00 per share. As discussed in the
section titled “Warrants”, which appears below, we issued common stock purchase
warrants to purchase an aggregate of 3,243,378 shares of our common stock at
$1.00 per share in conjunction with the sale of the 10% Secured Convertible
Debentures. As of the date of this prospectus, we have received
conversion notices for the remaining $371,671 in aggregate principal amount
outstanding of the 10% Secured Convertible Debentures. During August 2009, we
received a waiver from the holders of the 10% Secured Convertible Debentures
pursuant to which they 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 certain
anti-dilution provisions contained in these instruments.
61
On August
19, 2008 and on September 22, 2008 we signed Consent and Waiver agreements with
the holders of certain of our 10% Secured Convertible
Debentures. Pursuant to the Consent and Waiver agreements, each
holder of our 10% Secured Convertible Debentures could choose to accept either
shares of our common stock having an agreed upon value of $0.85 or a 10%
Convertible Debenture as payment for accrued interest and liquidated
damage. The 10% Convertible Debenture accrues interest at the rate of
10% per annum, has a maturity date 18 months from the date of issuance, and may
be converted to common stock at the rate of $0.85 per share. On
November 21, 2008 we agreed to accelerate the maturity date of the 10%
Convertible Debentures to September 12, 2009. As of the date of this
prospectus, we have received conversion notices for the remaining $126,103 in
aggregate principal amount outstanding of the 10% Convertible
Debentures.
From
November 25, 2008 through January, 2009, we consummated the sale of our
subordinated 10% Convertible Promissory Notes (the “Notes”) and warrants for the
purchase of shares of our common stock. The terms of the warrants are
discussed in the section titled “Warrants”, which appears below. The
Notes are convertible into shares of our common stock at a conversion price of
$1.25 per share. All outstanding principal and interest of the Notes
is due eleven months from the date of issuance. We sold Notes having
a total of $1,200,000 in principal amount which may be converted into 960,000
shares of our common stock and we issued warrants for the purchase of 480,000
shares of common stock. As of the date of this prospectus, we have received
conversion notices for the entire $1,200,000 in aggregate principal amount of
the Notes. During August 2009, we received a waiver from the holders of the 10%
Convertible Promissory Notes pursuant to which they 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 certain anti-dilution provisions contained in these
instruments.
In May
2009, we consummated the sale of our subordinated 10% Convertible Promissory
Notes (the “Notes”). The Notes are convertible into shares of our
common stock at a conversion price of $1.75 per share. All
outstanding principal and interest of the Notes was due five months from the
date of issuance. We sold Notes having a total of $300,000 in
principal amount which may be converted into 171,429 shares of our common stock.
As of the date of this prospectus, we have received conversion notices for the
entire $300,000 in aggregate principal amount of the Notes.
Warrants
We have
outstanding warrants to purchase 2,241,093 shares of our common stock that were
issued in conjunction with the offering of our 10% Secured Convertible
Debentures. The warrant exercise price is $1.00 per
share. These warrants are immediately exercisable. If
there was no effective registration statement registering the underlying shares
on September 12, 2007, these warrants contain cashless exercise provisions that
allow the holder to exercise the warrant for a lesser number of shares of common
stock in lieu of paying cash. The number of shares that would be
issued in this case would be based upon the market price of the common stock at
the time of the net exercise, or if there is no market price, the price per
share as determined by our board of directors. Pursuant to our warrant tender
offer, warrants that cover 712,130 shares of common stock were amended to delete
the cashless exercise provision. A registration statement covering a
portion of the shares underlying these warrants was declared effective on July
19, 2007. On November 21, 2008, the holders of these warrants agreed
to waive the requirement that we maintain a registration statement registering
the resale of the shares of common stock underlying the warrants, provided that
such underlying shares carry piggyback registration rights.
We have
outstanding warrants to purchase 706,341 shares of our common stock at an
exercise price of $1.01 per share. These warrants are immediately
exercisable and contain cashless exercise provisions that allow the holder to
exercise the warrant for a lesser number of shares of common stock in lieu of
paying cash. The number of shares that would be issued in this case
would be based upon the market price of the common stock at the time of the net
exercise, or if there is no market price, the price per share as determined by
our board of directors.
We have
outstanding warrants (the “OID Warrants”) to purchase 324,875 shares of our
common stock at an exercise price of $1.20 per share that were issued in
conjunction with the sale of our 7.41% Senior Secured Notes. The OID
Warrants are immediately exercisable and include cashless exercise provisions
that allow the holder to exercise the warrant for a lesser number of shares of
common stock in lieu of paying cash. The number of shares that would
be issued if a cashless exercise were chosen would be based upon the market
price of the common stock at the time of the exercise, or if there is no market
price, at a price per share to be determined by our board of directors. Pursuant
to our warrant tender offer, warrants that cover 84,875 shares of common stock
were amended to delete the cashless exercise provision from these
warrants.
62
We have
outstanding warrants to purchase 128,983 shares of our common stock at an
exercise price of $1.00 per share. These warrants were issued to the
holders of our 10% Secured Convertible Debentures in exchange for the Consent
and Waiver agreement signed in March 2007, pursuant to which the holders of
these debentures waived certain defaults related to the Registration Rights
Agreement we entered into and allowed us to sell the 7.41% Senior Secured
Notes. The warrants are immediately exercisable and include cashless
exercise provisions that allow the holder to exercise the warrant for a lesser
number of shares of common stock in lieu of paying cash. The number of shares
that would be issued if a cashless exercise were chosen would be based upon the
market price of the common stock at the time of the exercise, or if there is no
market price, at a price per share to be determined by our board of directors.
Pursuant to our warrant tender offer, warrants that cover 19,760 shares of
common stock were amended to delete the cashless exercise provision from these
warrants.
We have
outstanding warrants to purchase 196,222 shares of our common stock at an
exercise price of $1.00 per share and 272,000 shares of our common stock at an
exercise price of $1.25 per share. These warrants were issued to 1st
Worldwide Financial Partners, LLC and its affiliates as partial compensation for
placement agent services that they rendered to us.
We have
outstanding warrants to purchase 362,500 shares of our common stock at an
exercise price of $1.25 per share. These warrants were issued to Oceana
Partners, LLC or its designees as compensation for services that they rendered
to us.
We have
outstanding warrants to purchase 30,800 shares of our common stock at an
exercise price of $1.25 per share. These warrants were issued to a shareholder
in consideration of a $160,000 bridge loan.
We have
outstanding warrants to purchase 1,459,751 shares of our common stock that were
issued in conjunction with an offering of units consisting of shares of our
common stock and warrants to purchase our common stock. The warrants
have a five year term and an exercise price of $1.25.
We have
outstanding warrants to purchase 148,000 shares of our common
stock. The warrants were issued in conjunction with an offering of
our subordinated 10% Convertible Promissory Notes that we consummated in
multiple closings between November 13, 2008 and January 28, 2009. The
warrants have a term of 5 years and an exercise price of $1.25 per
share. The warrants are redeemable by the Company, after the
expiration of a redemption notice period, at a price of $0.01 per share in the
event (i) the average volume weighted average price of our common stock for 10
consecutive trading days equals or exceeds 2.5 times the then current exercise
price, (ii) the average daily trading volume of our common stock during such
10-trading day period is at least 50,000 shares and (iii) there is an effective
registration statement covering the resale of the shares issuable upon exercise
of the warrants.
We have
outstanding warrants to purchase 2,235,000 shares of our common stock at an
exercise price of $1.25 per share. These warrants were issued to Newview Finance
LLC as compensation for investor relations services.
We have
outstanding vested warrants to purchase 2,835,295 shares of our common stock at
an exercise price of $1.25 per share. These shares were issued to GR Match LLC
pursuant to the Media and Marketing Services Agreement dated March 24,
2009.
We have
outstanding warrants to purchase 5,000 shares of our common stock at an exercise
price of $1.25 per share and 2,500 shares of our common stock at an exercise
price of $1.80 per share. These warrants were issued to a consultant as
compensation for accounting services.
63
We have
outstanding warrants to purchase 21,613 shares of our common stock at an
exercise price of $1.25 per share and 125,000 shares of our common stock at an
exercise price of $1.83 per share. These warrants were issued to two marketing
consultants as compensation for marketing services that they rendered to
us.
We have
outstanding warrants to purchase 850,000 shares of our common stock at an
exercise price of $1.25 per share. These shares were issued to SCP Holdings LLC
as compensation for services. These warrants vest as follows: 300,000 shares
vested on the date of the grant and 50,000 shares vest on the first day of each
month commencing May 1, 2009 and ending on March 1, 2010.
The
exercise price and the number of shares issuable upon exercise of all the
foregoing warrants will be adjusted upon the occurrence of certain events,
including reclassifications, reorganizations or combinations of our common
stock. At all times that the warrants are outstanding, we will
authorize and reserve at least that number of shares of common stock equal to
the number of shares of common stock issuable upon exercise of all outstanding
warrants.
Unit
Purchase Options
We have
outstanding Unit Purchase Options, exercisable at $1.00 per unit, for the
purchase of a total of 217,000 shares of our common stock along with warrants
for the purchase of 217,000 shares of our common stock at $1.00 per
share. These Unit Purchase Options have a term of five years and were
granted to Oceana Partners, LLC and its designee in exchange for financial,
strategic and management consulting services.
Registration
Rights
In
conjunction with the warrant we issued to Newview Finance LLC we agreed to file
a registration statement registering the resale of the common stock underlying
the warrant by January 25, 2009 and to cause the registration statement to
become effective within 120 days after the filing date. We received
an extension to file this registration statement until September 18, 2009. If we
are delinquent in either of these deadlines, we will be obligated to pay Newview
a one-time payment of $0.01 per each warrant share, payable in cash or in shares
of our common stock valued at the market price of the common stock at the time
of such delinquency.
In
conjunction with warrants we issued to GRM, we granted demand and “piggyback”
registration rights to GRM. Upon written demand by GRM, we are required to
prepare and file with the Securities and Exchange Commission, as soon as
practicable but in no event later than 45 days, a registration statement in
order to register the resale of all the common stock underlying the warrant, to
use our best efforts to cause such registration statement to become effective as
soon as practicable after the filing date thereof, and to keep the registration
statement effective for at least 24 months following the effective
date.
In
conjunction with the Consent and Waiver Agreement we entered into on November
21, 2008, we granted “piggyback” registration rights to the holders of our 10%
Secured Convertible Debentures. The piggyback registration rights
cover a total of 396,671 shares of common stock that may be issued upon
conversion of our 10% Convertible Debentures and 148,357 shares of common stock
issued in payment of interest and liquidated damages, and 2,303,593 shares of
common stock underlying the warrants we issued in the offering of our 10%
Secured Convertible Debentures.
In
conjunction with Securities Purchase Agreements we entered into on June 4, 2009
and June 10, 2009 we granted demand and “piggyback” registration rights to the
purchasers. Upon written demand by the purchasers, we are required to prepare
and file with the Securities and Exchange Commission, as soon as practicable but
in no event later than 45 days, a registration statement in order to register
the resale of all the common stock purchased, to use our best efforts to cause
such registration statement to become effective as soon as practicable after the
filing date thereof, and to keep the registration statement effective for at
least 24 months following the effective date. The registration rights cover a
total of 1,775,360 shares of common stock.
64
Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities
Section
317 of the California Corporations Code states that a corporation shall have the
power to indemnify any person who was or is a party or is threatened to be made
a party to any proceeding (other than an action by or in the right of the
corporation to procure a judgment in its favor) by reason of the fact that the
person is or was an agent of the corporation, against expenses, judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with the proceeding if that person acted in good faith and in a
manner the person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful. In addition, a corporation
shall have the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action by
or in the right of the corporation to procure a judgment in its favor by reason
of the fact that the person is or was an agent of the corporation, against
expenses actually and reasonably incurred by that person in connection with the
defense or settlement of the action if the person acted in good faith, in a
manner the person believed to be in the best interests of the corporation and
its shareholders.
With
regard to a provision authorizing the indemnification of directors or agents in
excess of that expressly permitted by Section 317, Section 204 of the California
Corporations Code stipulates that (A) such a provision may not eliminate or
limit the liability of directors or agents, among other things, (i) for acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director or agent believes
to be contrary to the best interests of the corporation or its shareholders or
that involve the absence of good faith on the part of the director or agent,
(iii) for any transaction from which a director or agent derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's or agent's duty to the corporation or its shareholders in
circumstances in which the director or agent was aware, or should have been
aware, in the ordinary course of performing a director’s or agent’s duties, of a
risk of serious injury to the corporation or its shareholders, or (v) for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's or agent’s duty to the corporation or its
shareholders, (B) no such provision shall eliminate or limit the liability of a
director or agent for any act or omission occurring prior to the date when the
provision becomes effective, and (C) no such provision shall eliminate or limit
the liability of an officer for any act or omission as an officer,
notwithstanding that the officer is also a director or agent or that his or her
actions, if negligent or improper, have been ratified by the
directors.
For
purposes of Section 317, “agent” means any person who is or was a director,
officer, employee or other agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the corporation or
of another enterprise at the request of the predecessor corporation;
“proceeding” means any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative; and “expenses”
includes without limitation attorneys’ fees and any expenses of establishing a
right to indemnification.
Our
articles of incorporation provide that the liability of the directors for
monetary damages shall be eliminated to the fullest extent under California law.
In addition, it provides that we are authorized to provide indemnification to
agents (as defined in Section 317) for breach of duty to us and our shareholders
through bylaw provisions or through agreements with agents, or both, in excess
of the indemnification permitted by Section 317, subject to the limits on such
excess indemnification set forth in Section 204. Our bylaws provide that our
directors and officers shall be indemnified by us to the fullest extent not
prohibited by the California Corporations Code. Our bylaws also allow
us to purchase and maintain insurance on behalf of any agent (as defined in
Section 317) against any liability asserted against or incurred by the agent in
such capacity or arising from the agent’s status as such, whether or not we
would have the power to indemnify the agent against such liability under the
provisions of Section 317 of the California Corporations Code.
65
On
October 30, 2006, we entered into Indemnification Agreements with Mr. Guseinov,
Mr. Eckelberry, Mr. Ivankovich, Mr. Liu and Mr. Barash, on November 6, 2007 we
entered into an Indemnification Agreement with Mr. LaValle, on February 1, 2008
we entered into an Indemnification Agreement with Mr. Barrett, on January 1,
2009 the Company entered into an Indemnification Agreement with Mr. Harris and
on July 21, 2009 we entered into an Indemnification Agreement with Mr. Van de
Bunt, all of whom are sometimes collectively referred to in this discussion as
the “indemnified parties” or individually referred to as an “indemnified
party”. The agreements require us to provide indemnification for the
indemnified parties for expenses (including attorneys’ fees, expert fees, other
professional fees and court costs, and fees and expenses incurred in connection
with any appeals), judgments (including punitive and exemplary damages),
penalties, fines and amounts paid in settlement (if such settlement is approved
in advance by us, which approval shall not be unreasonably withheld) actually
and reasonably incurred by the indemnified parties in connection with any
threatened, pending or completed action or proceeding (including actions brought
on our behalf, such as shareholder derivative actions), whether civil, criminal,
administrative or investigative, to which he is or was a party, a witness or
other participant (or is threatened to be made a party, a witness or other
participant) by reason of the fact that he is or was a director, officer,
employee or agent of ours or of any of our subsidiaries. The
indemnification covers any action or inaction on the part of the indemnified
party while he was an officer or director or by reason of the fact that he is or
was serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise. We must advance the costs of the fees and expenses within
20 days following the delivery of a written request from an indemnified
party (except with respect to Mr. Van De Bunt’s Indemnification Agreement,
which requires us to advance fees and expenses within 5 days following delivery
of a written request from Mr. Van De Bunt). The indemnified parties
have agreed to promptly repay the advances only if, and to the extent that, it
is ultimately determined by the court (as to which all rights of appeal
therefrom have been exhausted or lapsed) that the indemnified party is not
entitled to the indemnity. The indemnified parties’ obligations to
repay us for any such amounts are unsecured and no interest will be charged
thereon. We also agreed to indemnify the indemnified parties to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of the Indemnification
Agreements, our Articles of Incorporation, our bylaws or by
statute. In the event of any change, after the date of the
Indemnification Agreements, in any applicable law, statute or rule which expands
the right of a California corporation to indemnify a member of its board of
directors or an officer, such changes shall be within the purview of the
indemnified parties’ rights and our obligations under the Indemnification
Agreements. In the event of any change in any applicable law, statute
or rule which narrows the right of a California corporation to indemnify a
member of its board of directors or an officer, such changes, to the extent not
otherwise required by such law, statute or rule to be applied to the
Indemnification Agreements will have no effect on the or the rights and
obligations of the indemnified parties and the company under
them. The indemnification provided by the Indemnification Agreements
is not exclusive of any rights to which the indemnified parties may be entitled
under our Articles of Incorporation, bylaws, any agreement, any vote of
shareholders or disinterested directors or the California Corporations
Code. The indemnification provided under the Indemnification
Agreements continues for any action taken or not taken while an indemnified
party serves in an indemnified capacity, even though he may have ceased to serve
in such capacity at the time of any action or other covered
proceeding. If the indemnification provided for in the
Indemnification Agreement is unavailable to an indemnified party, in lieu of
indemnifying the indemnified party we will contribute to the amount incurred by
him, whether for judgments, fines, penalties, excise taxes, amounts paid or to
be paid in settlement and/or for expenses, in connection with any claim relating
to an indemnifiable event, in such proportion as is deemed fair and reasonable
by the court before which the action was brought. We are not
obligated to provide indemnification pursuant to the terms of the
Indemnification Agreements
·
|
for
any acts or omissions or transactions from which a director may not be
relieved of liability under the California General Corporation Law; or for
breach by an indemnified party of any duty to us or our shareholders as to
circumstances in which indemnity is expressly prohibited by
Section 317 of the California General Corporation Law;
or
|
·
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with
respect to proceedings or claims initiated or brought voluntarily by an
indemnified party not by way of defense, (except with respect to
proceedings or claims brought to establish or enforce a right to
indemnification) although such indemnification may be provided if our
Board of Directors has approved the initiation or bringing of such
proceeding or claim; or
|
·
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with
respect to any proceeding instituted by the indemnified party to enforce
or interpret the Indemnification Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
indemnified party in such proceeding was not made in good faith or was
frivolous; or
|
·
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for
expenses or liabilities of any type whatsoever which have been paid
directly to an indemnified party by an insurance carrier under a policy of
directors’ and officers’ liability insurance maintained by us;
or
|
66
·
|
for
expenses and the payment of profits arising from the purchase and sale by
an indemnified party of securities in violation of Section 16(b) of
the Securities Exchange Act of 1934, as amended, or any similar successor
statute.
|
The
Indemnification Agreements are effective as of the date they were signed and may
apply to acts or omissions of the indemnified parties which occurred prior to
such date if the indemnified party was an officer, director, employee or other
agent of our company, or was serving at our request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, at the time such act or omission occurred. All of
the obligations under the Indemnification Agreements will continue as long as an
indemnified party is subject to any actual or possible matter which is the
subject of the Indemnification Agreement, notwithstanding an indemnified party’s
termination of service as an officer or director.
The
indemnification provisions included in the California Corporations Code, our
articles of incorporation and bylaws, and the Indemnification Agreements may be
sufficiently broad to permit indemnification of our executive officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act of 1933, as amended.
Insofar
as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
of 1933, as amended, and is, therefore, unenforceable. No pending material
litigation or proceeding involving our directors, executive officers, employees
or other agents as to which indemnification is being sought exists, and we are
not aware of any pending or threatened material litigation that may result in
claims for indemnification by any of our directors or executive
officers.
Where
You Can Find More Information
We have
filed with the Securities and Exchange Commission a registration statement on
Form S-1 under the Securities Act of 1933, as amended, with respect to the
common stock being offered in this offering. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules filed as part of the registration
statement. For further information with respect to us and our common
stock, we refer you to the registration statement and the exhibits and schedules
filed as a part of the registration statement. Statements contained
in this prospectus concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been
filed as an exhibit to the registration statement, we refer you to the copy of
the contract or document that has been filed. Each statement in this
prospectus relating to a contract or document filed as an exhibit is qualified
in all respects by the filed exhibit. The reports and other
information we file with the Securities and Exchange Commission can be read and
copied at the Securities and Exchange Commission’s Public Reference Room at 100
F Street, N.E., Washington D.C. 20549. Copies of these materials can
be obtained at prescribed rates from the Public Reference Section of the
Securities and Exchange Commission at the principal offices of the Securities
and Exchange Commission, 100 F Street, N.E., Washington D.C.
20549. You may obtain information regarding the operation of the
public reference room by calling 1 (800) SEC-0330. The Securities and
Exchange Commission also maintains a website (http://www.sec.gov) that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the Securities and Exchange
Commission.
We are
subject to the information and periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, and we file periodic reports, proxy statements
and other information with the Securities and Exchange Commission.
Experts
KMJ
Corbin & Company LLP, an independent registered public accounting firm,
audited our financial statements at December 31, 2008 and 2007, as set forth in
their report. We have included our financial statements in this
prospectus and elsewhere in the registration statement in reliance on the
reports of KMJ Corbin & Company LLP, given on their authority as experts in
accounting and auditing.
67
Legal
Matters and Interests of Named Experts
Richardson
& Patel LLP has given us an opinion relating to the due issuance of the
common stock being registered. Richardson & Patel LLP and its
principals have accepted our common stock in exchange for services rendered to
us in the past and, although the law firm and its principals are under no
obligation to do so, they may continue to accept our common stock for services
rendered by them. As of the date of this prospectus, Richardson &
Patel LLP and its principals collectively own 226,449 shares of our common
stock, warrants to purchase 2,890 shares of our common stock and a 10% Secured
Convertible Debenture that may be converted into 20,834 shares of our common
stock. Richardson & Patel LLP has exercised its right to convert
the 10% Secured Convertible Debenture into shares of our common
stock.
68
Part
II
Item
13. Other Expenses of Issuance and Distribution.
The
following is an itemized statement of all expenses, all of which we will pay, in
connection with the registration of the common stock offered
hereby:
Amount
|
||||
SEC
registration fee
|
$
|
1,194
|
||
Printing
fees
|
*$
|
1,500
|
|
|
Legal
fees
|
*$
|
25,000
|
|
|
Accounting
fees and expenses
|
*$
|
7,500
|
||
Miscellaneous
|
*$
|
-
|
|
|
Total
|
*$
|
35,194
|
|
*Estimates
Item
14. Indemnification of Directors and Officers.
Section
317 of the California Corporations Code states that a corporation shall have the
power to indemnify any person who was or is a party or is threatened to be made
a party to any proceeding (other than an action by or in the right of the
corporation to procure a judgment in its favor) by reason of the fact that the
person is or was an agent of the corporation, against expenses, judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with the proceeding if that person acted in good faith and in a
manner the person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful. In addition, a corporation
shall have the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action by
or in the right of the corporation to procure a judgment in its favor by reason
of the fact that the person is or was an agent of the corporation, against
expenses actually and reasonably incurred by that person in connection with the
defense or settlement of the action if the person acted in good faith, in a
manner the person believed to be in the best interests of the corporation and
its shareholders.
With
regard to a provision authorizing the indemnification of directors or agents in
excess of that expressly permitted by Section 317, Section 204 of the California
Corporations Code stipulates that (A) such a provision may not eliminate or
limit the liability of directors or agents, among other things, (i) for acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director or agent believes
to be contrary to the best interests of the corporation or its shareholders or
that involve the absence of good faith on the part of the director or agent,
(iii) for any transaction from which a director or agent derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's or agent's duty to the corporation or its shareholders in
circumstances in which the director or agent was aware, or should have been
aware, in the ordinary course of performing a director’s or agent’s duties, of a
risk of serious injury to the corporation or its shareholders, or (v) for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's or agent’s duty to the corporation or its
shareholders, (B) no such provision shall eliminate or limit the liability of a
director or agent for any act or omission occurring prior to the date when the
provision becomes effective, and (C) no such provision shall eliminate or limit
the liability of an officer for any act or omission as an officer,
notwithstanding that the officer is also a director or agent or that his or her
actions, if negligent or improper, have been ratified by the
directors.
For
purposes of Section 317, “agent” means any person who is or was a director,
officer, employee or other agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the corporation or
of another enterprise at the request of the predecessor corporation;
“proceeding” means any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative; and “expenses”
includes without limitation attorneys’ fees and any expenses of establishing a
right to indemnification.
69
The
registrant’s articles of incorporation provide that the liability of the
directors for monetary damages shall be eliminated to the fullest extent under
California law. In addition, it provides that the registrant is
authorized to provide indemnification to agents (as defined in Section 317) for
breach of duty to the registrant and its shareholders through bylaw provisions
or through agreements with agents, or both, in excess of the indemnification
permitted by Section 317, subject to the limits on such excess indemnification
set forth in Section 204. The registrant’s bylaws provide that its
directors and officers shall be indemnified by the registrant to the fullest
extent not prohibited by the California Corporations Code. The
registrant’s bylaws also allow it to purchase and maintain insurance on behalf
of any agent (as defined in Section 317) against any liability asserted against
or incurred by the agent in such capacity or arising from the agent’s status as
such, whether or not the registrant would have the power to indemnify the agent
against such liability under the provisions of Section 317 of the California
Corporations Code.
On
October 30, 2006, the registrant entered into Indemnification Agreements with
Mr. Guseinov, Mr. Eckelberry, Mr. Ivankovich, Mr. Liu and Mr. Barash, on
November 6, 2007 the registrant entered into an Indemnification Agreement with
Mr. LaValle, on February 1, 2008 the registrant entered into an Indemnification
Agreement with Mr. Barrett, on January 1, 2009 the registrant entered into an
Indemnification Agreement with Mr. Harris and on July 21, 2009 the registrant
entered into an Indemnification Agreement with Mr. Van de Bunt, all of whom are
sometimes collectively referred to in this discussion as the “indemnified
parties” or individually referred to as an “indemnified party”. The
agreements require the registrant to provide indemnification for the indemnified
parties for expenses (including attorneys’ fees, expert fees, other professional
fees and court costs, and fees and expenses incurred in connection with any
appeals), judgments (including punitive and exemplary damages), penalties, fines
and amounts paid in settlement (if such settlement is approved in advance by the
registration, which approval shall not be unreasonably withheld) actually and
reasonably incurred by the indemnified parties in connection with any
threatened, pending or completed action or proceeding (including actions brought
on the registrant’s behalf, such as shareholder derivative actions), whether
civil, criminal, administrative or investigative, to which he is or was a party,
a witness or other participant (or is threatened to be made a party, a witness
or other participant) by reason of the fact that he is or was a director,
officer, employee or agent of the registrant or of any of the registrant’s
subsidiaries. The indemnification covers any action or inaction on
the part of the indemnified party while he was an officer or director or by
reason of the fact that he is or was serving at request of the registrant as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The registrant must advance the
costs of the fees and expenses within 20 days following the delivery of a
written request from an indemnified party (except with respect to Mr. Van De
Bunt’s Indemnification Agreement, which requires us to advance fees and expenses
within 5 days following delivery of a written request from Mr. Van De
Bunt). The indemnified parties have agreed to promptly repay the
advances only if, and to the extent that, it is ultimately determined by the
court (as to which all rights of appeal therefrom have been exhausted or lapsed)
that the indemnified party is not entitled to the indemnity. The
indemnified parties’ obligations to repay the registrant for any such amounts
are unsecured and no interest will be charged thereon. The registrant
also agreed to indemnify the indemnified parties to the fullest extent permitted
by law, notwithstanding that such indemnification is not specifically authorized
by the other provisions of the Indemnification Agreements, the registrant’s
Articles of Incorporation, its bylaws or by statute. In the event of
any change, after the date of the Indemnification Agreements, in any applicable
law, statute or rule which expands the right of a California corporation to
indemnify a member of its board of directors or an officer, such changes shall
be within the purview of the indemnified parties’ rights and the registrant’s
obligations under the Indemnification Agreements. In the event of any
change in any applicable law, statute or rule which narrows the right of a
California corporation to indemnify a member of its board of directors or an
officer, such changes, to the extent not otherwise required by such law, statute
or rule to be applied to the Indemnification Agreements will have no effect on
the or the rights and obligations of the indemnified parties and the registrant
under them. The indemnification provided by the Indemnification
Agreements is not exclusive of any rights to which the indemnified parties may
be entitled under the registrant’s Articles of Incorporation, bylaws, any
agreement, any vote of shareholders or disinterested directors or the California
Corporations Code. The indemnification provided under the
Indemnification Agreements continues for any action taken or not taken while an
indemnified party serves in an indemnified capacity, even though he may have
ceased to serve in such capacity at the time of any action or other covered
proceeding. If the indemnification provided for in the
Indemnification Agreement is unavailable to an indemnified party, in lieu of
indemnifying the indemnified party the registrant will contribute to the amount
incurred by him, whether for judgments, fines, penalties, excise taxes, amounts
paid or to be paid in settlement and/or for expenses, in connection with any
claim relating to an indemnifiable event, in such proportion as is deemed fair
and reasonable by the court before which the action was brought. The
registrant not obligated to provide indemnification pursuant to the terms of the
Indemnification Agreements
70
·
|
for
any acts or omissions or transactions from which a director may not be
relieved of liability under the California General Corporation Law; or for
breach by an indemnified party of any duty to the registrant or its
shareholders as to circumstances in which indemnity is expressly
prohibited by Section 317 of the California General Corporation Law;
or
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·
|
with
respect to proceedings or claims initiated or brought voluntarily by an
indemnified party not by way of defense, (except with respect to
proceedings or claims brought to establish or enforce a right to
indemnification) although such indemnification may be provided if the
registrant’s Board of Directors has approved the initiation or bringing of
such proceeding or claim; or
|
|
·
|
with
respect to any proceeding instituted by the indemnified party to enforce
or interpret the Indemnification Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
indemnified party in such proceeding was not made in good faith or was
frivolous; or
|
·
|
for
expenses or liabilities of any type whatsoever which have been paid
directly to an indemnified party by an insurance carrier under a policy of
directors’ and officers’ liability insurance maintained by the registrant;
or
|
·
|
for
expenses and the payment of profits arising from the purchase and sale by
an indemnified party of securities in violation of Section 16(b) of
the Securities Exchange Act of 1934, as amended, or any similar successor
statute.
|
The
Indemnification Agreements are effective as of the date they were signed and may
apply to acts or omissions of the indemnified parties which occurred prior to
such date if the indemnified party was an officer, director, employee or other
agent of the registrant, or was serving at the request of the registrant as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, at the time such act or omission
occurred. All of obligations under the Indemnification Agreements
will continue as long as an indemnified party is subject to any actual or
possible matter which is the subject of the Indemnification Agreement,
notwithstanding an indemnified party’s termination of service as an officer or
director.
These
indemnification provisions included in the California Corporation’s Code, the
registrant’s Articles of Incorporation and bylaws and the Indemnification
Agreements may be sufficiently broad to permit indemnification of the
registrant’s executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of
1933.
Item
15. Recent Sales of Unregistered Securities.
During
the past three years, the registrant has issued and sold the following
unregistered securities. The discussions below take into account the
reverse stock split that was affected on October 30, 2006.
During
July 2009, the registrant entered into Securities Purchase Agreements with
twenty-eight accredited investors pursuant to which it sold 200,000 shares of
its common stock at $2.50 per share. There were no underwriting discounts or
other commissions paid in conjunction with these transactions. The issuance of
the shares was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended, inasmuch as the shares were issued to accredited investors
without any form of general solicitation or general
advertising.
On July
1, 2009, a certain holder of 10% Secured Convertible Debentures, converted
$25,000 of principal into 25,000 shares of common stock. The registrant relied
on section 3(a)(9) of the Securities Act of 1933 to issue the securities
inasmuch as we exchanged the securities with our existing security holder
exclusively and no commission or other remuneration was paid or given directly
or indirectly for soliciting such exchange.
71
On July
1, 2009, one investor exercised warrants to purchase 62,500 shares of common
stock exercisable at $1.00 per share. The warrant was exercised
pursuant to the cashless provision contained in the warrant and as such, the
registrant issued 43,446 warrant shares to the investor. The
registrant relied on section 3(a)(9) of the Securities Act of 1933 to issue the
securities inasmuch as we exchanged the securities with our existing security
holder exclusively and no commission or other remuneration was paid or given
directly or indirectly for soliciting such exchange.
On June
4, 2009 and June 10, 2009 the registrant entered into Securities Purchase
Agreements with two accredited investors pursuant to which it sold an aggregate
of 1,775,360 shares of its common stock at $1.75 per share. There were no
underwriting discounts or other commissions paid in conjunction with these
transactions. The issuance of the shares was exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder, inasmuch as the shares were issued to
accredited investors without any form of general solicitation or general
advertising.
In June
2009, five investors exercised warrants to purchase 116,232 shares of common
stock exercisable at $1.00 to $1.01 per share. The warrants were
exercised pursuant to the cashless provision contained in the
warrants. The registrant issued 82,378 shares of common stock to the
investors. The registrant relied on section 3(a)(9) of the Securities
Act of 1933 to issue the securities inasmuch as we exchanged the securities with
our existing security holders exclusively and no commission or other
remuneration was paid or given directly or indirectly for soliciting such
exchange.
During
May and June 2009, a holder of 10% Convertible Debentures, converted $68,855 of
principal into 81,006 shares of common stock at $0.85 per share. The registrant
relied on section 3(a)(9) of the Securities Act of 1933 to issue the securities
inasmuch as we exchanged the securities with our existing security holders
exclusively and no commission or other remuneration was paid or given directly
or indirectly for soliciting such exchange.
On May
15, 2009, the registrant entered into a three month agreement with Spetcu
International LLC for marketing related services. As part of the
agreement, the consultant was granted a warrant to purchase 15,000 shares of the
registrant’s common stock for a period of five years at an exercise price of
$1.83. The right to purchase vested 5,000 shares per month over the
term of the agreement. The agreement also provided for a bonus of up to 50,000
additional warrant shares at an exercise price of $1.83 for achieving certain
goals. On June 15, 2009, the agreement was terminated, including the right to
purchase 10,000 shares of common stock that had not vested, and the registrant
entered into a second two month agreement with the consultant. As
part of the second agreement, the consultant was granted a warrant to purchase
10,000 shares of the registrant’s common stock for a period of five years at an
exercise price of $1.83. The right to purchase vests 5,000 shares per
month over the term of the agreement. Additionally, the consultant was granted a
warrant to purchase 5,000 shares of the registrant’s common stock for a period
of five years at an exercise price of $1.83 for deferring the payment of 50% of
the compensation owed for services rendered during May 2009 until July 30, 2009
and a warrant to purchase 5,000 shares of the registrant’s common stock for a
period of five years at an exercise price of $1.83 as part of the bonus per the
second agreement. The second agreement also provided for a bonus of up to 45,000
additional warrant shares at an exercise price of $1.83 for achieving certain
goals. These goals were achieved and the 45,000 additional shares
were granted on August 15, 2009. The registrant relied on Section 4(2) of the
Securities Act of 1933 to issue the securities inasmuch as the securities were
offered and sold without any form of general solicitation or general advertising
and the offeree made representations that he was an accredited
investor.
Between
May 1, 2009 and May 7, 2009, the registrant consummated the sale
of $300,000 in aggregate principal amount of its subordinated 10%
Convertible Promissory Notes (the “Notes”), convertible into common stock at a
conversion price of $1.75 per share (the “Conversion Price”) to accredited
investors. All outstanding principal and interest of the Notes is due
five months from the date of issuance. Out of the total gross
proceeds of the offering, the registrant paid its placement agent $72,000 in
commissions, equal to 6% of the gross proceeds of the offering, and issued to
its placement agent a warrant to purchase 57,600 shares of common stock, equal
to 6% of the number of shares of common stock into which the Notes initially may
be converted, at an exercise price of $1.25 per share. The offering
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the
securities were issued to accredited investors only without any form of general
solicitation or general advertising.
72
In May
2009, one investor exercised warrants to purchase 172,928 shares of common stock
exercisable at $1.00 per share. The warrant was exercised pursuant to
the cashless provision contained in the warrant and as such, the registrant
issued 88,150 warrant shares to the investor. The registrant relied
on section 3(a)(9) of the Securities Act of 1933 to issue the securities
inasmuch as we exchanged the securities with our existing security holder
exclusively and no commission or other remuneration was paid or given directly
or indirectly for soliciting such exchange.
Pursuant
to the registrant’s tender offer to the holders of warrants issued with
“cashless exercise” provisions and/or “down-round” provisions (collectively the
“Released Provisions”) that closed on August 17, 2009, the registrant offered to
increase by 10% the number of shares of common stock covered by their warrants
in exchange for extinguishing the Released Provisions from their
warrants. In order for the warrant holders to take advantage of the
offer, they were required to exercise a portion of their warrant(s) and purchase
for cash no less than 30% of the shares of common stock covered by their
warrant(s), after giving effect to the increase. The registrant
received $2,008,180 in proceeds, net of offering costs of $72,836, and issued
1,838,952 shares of common stock to warrant holders that participated in the
tender offer. Additionally, the registrant has issued warrants to
purchase 269,681 shares of the registrant’s common stock for the 10% increase in
warrants offered to warrant holders. The registrant relied on Section
4(2) of the Securities Act of 1933 to issue the securities inasmuch as the
securities were offered and sold without any form of general solicitation or
general advertising and the offerees were accredited investors.
On April
24, 2009, the registrant entered into an agreement with Michael Barrett for
consulting services relating to financial management and
reporting. As part of the agreement, Mr. Barrett was granted a
warrant to purchase 2,500 shares of common stock at an exercise price of $1.80
per share. The registrant relied on Section 4(2) of the Securities Act of 1933
to issue the securities inasmuch as Mr. Barrett occupied an insider status
relative to us that afforded him effective access to the information
registration would otherwise provide.
On April
5, 2009, the registrant entered into a three month agreement with a Christy
Hadzick for marketing related services. As part of the agreement, the
consultant was granted a warrant to purchase 15,000 shares of the registrant’s
common stock for a period of five years at an exercise price of
$1.25. The right to purchase the common stock was to vest at the rate
of 5,000 shares of common stock per month over the term of the agreement. On May
15, 2009, the original agreement was terminated, as was the unvested amount of
the warrant of 5,000 shares, and the registrant entered into a second three
month agreement with the consultant. As part of the agreement, the
consultant was granted a warrant to purchase 15,000 shares of the registrant’s
common stock for a period of five years at an exercise price of
$1.25. The right to purchase the common stock was to vest at the rate
of 5,000 shares of common stock per month over the term of the second agreement.
The second agreement also provided for a bonus of up to 50,000 additional
warrant shares at an exercise price of $1.83 for achieving certain goals. On
June 15, 2009, the second agreement was terminated, as was the unvested amount
of the warrant of 10,000 shares, and the registrant entered into a third two
month agreement with the consultant. As part of the third agreement, the
consultant was granted a warrant to purchase 10,000 shares of the registrant’s
common stock for a period of five years at an exercise price of
$1.25. The right to purchase 5,000 shares of common stock per month
vests over the term of the agreement. Additionally, the consultant was granted a
warrant to purchase 5,000 shares of the registrant’s common stock for a period
of five years at an exercise price of $1.83 for deferring the payment of 50% of
the compensation due to be paid for services rendered during May 2009 until July
30, 2009 and a warrant to purchase 5,000 shares of the registrant’s common stock
for a period of five years at an exercise price of $1.83 as part of the bonus
per the second agreement. The third agreement also provided for a bonus of up to
45,000 additional warrant shares at an exercise price of $1.83 for achieving
certain goals. These goals were achieved and the 45,000 additional
shares were granted on August 15, 2009. The registrant relied on Section 4(2) of
the Securities Act of 1933 to issue the securities inasmuch as the securities
were offered and sold without any form of general solicitation or general
advertising and the offeree made representations that he was an accredited
investor.
In April
2009, one investor exercised warrants to purchase 36,294 shares of common stock
exercisable at $1.01 per share. The warrant was exercised pursuant to
the cashless provision contained in the warrant and as such, the registrant
issued 16,732 warrant shares to the investor. The registrant relied
on Section 4(2) of the Securities Act of 1933 to issue the common stock inasmuch
as the securities were offered and sold without any form of general solicitation
or general advertising and the offeree made representations that he was an
accredited investor.
73
On April
1, 2009, the registrant entered into an agreement with SCP Holding, LLC for
management consulting and business advisory services on an as needed
basis. The consultant was granted a warrant to purchase 850,000
shares of the registrant’s common stock for a period of five years at an
exercise price of $1.25. The warrant vests as follows: the right to
purchase 300,000 shares of common stock vested on the date of the agreement and
the right to purchase 50,000 shares of common stock vested on the 1st day of
each month following the date of the agreement, commencing May 1st, 2009
and ending March 1, 2010. The registrant relied on Section 4(2) of
the Securities Act of 1933 to issue the common stock inasmuch as the securities
were offered and sold without any form of general solicitation or general
advertising and the offeree made representations that he was an accredited
investor.
In April
2009, certain holders of the registrant’s 10% Secured Convertible Debentures
converted $99,697 of principal into 99,697 shares of common stock at $1.00 per
share. The registrant relied on section 3(a)(9) of the Securities Act
of 1933 to issue the securities inasmuch as we exchanged the securities with our
existing security holders exclusively and no commission or other remuneration
was paid or given directly or indirectly for soliciting such
exchange.
In April
2009, we issued 15,779 shares of common stock to certain holders of the 10%
Secured Convertible Debentures for payment of interest and registration rights
penalties. The agreed upon value of the common stock was $0.85 per share. The
registrant relied on Section 4(2) of the Securities Act of 1933 to issue the
securities inasmuch as the securities were offered and sold without any form of
general solicitation or general advertising and the offeree made representations
that he was an accredited investor.
On March
24, 2009, the registrant entered into a Media and Marketing Services Agreement
with GRM. Pursuant to the Media and Marketing Services Agreement, GRM will
provide direct response media campaigns, including radio and television direct
response commercials, to promote the registrant’s products and services and will
purchase media time on the registrant’s behalf. In connection with
that agreement, the registrant agreed to amend and restate a 5-year warrant
previously issued in October 2008 to GRM for the purchase of 1,000,000 shares of
common stock at a price of $1.25 per share, so that the terms were
consistent with the warrants GRM received in conjunction with the Media and
Marketing Services Agreement. In conjunction with the execution of
the Media and Marketing Services Agreement and for creating, financing,
producing, testing and evaluating a television commercial to market the
registrant’s products, and in addition to the amended and restated 5-year
warrant for the purchase of 1,000,000 shares of common stock at a price of $1.25
per share, the registrant issued to GRM a second 5 year warrant for the purchase
of 1,000,000 shares of the registrant’s common stock at a price of $1.25 per
share. This warrant may be exercised only for cash. Finally, the
registrant issued to GRM a 5 year warrant for the purchase of 8,000,000 shares
of the registrant’s common stock at an exercise price of $1.25 per share. This
warrant may be exercised only for cash. This warrant was issued to compensate
GRM for providing media placement costs on 45 days terms with us and will be
subject to vesting as follows: for each $2 of media placement costs advanced by
GRM on the registrant’s behalf, the right to purchase one share of the
registrant’s common stock will vest. If GRM terminates the agreement due to a
breach by the registrant in the registrant’s performance or as a result of the
registrant’s discontinuance, dissolution, liquidation, winding up or insolvency,
or if the registrant terminates the agreement for any reason, other than as a
result of a breach by GRM or the registrant’s discontinuance, dissolution,
liquidation, winding up or insolvency, then any unexpired and unvested rights of
GRM to purchase shares of the registrant’s common stock pursuant to this third
warrant will immediately vest. If the registrant breaches its payment
obligations under the agreement and fails 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. The registrant relied on Section 4(2) of the Securities Act of 1933 to
issue the warrants inasmuch as the securities were offered and sold without any
form of general solicitation or general advertising and the offeree made
representations that it was an accredited investor.
In March
2009, certain holders of the registrant’s 10% Secured Convertible Debentures
converted $854,163 of principal into 854,163 shares of common stock at $1.00 per
share. The registrant relied on section 3(a)(9) of the Securities Act
of 1933 to issue the securities inasmuch as we exchanged the securities with our
existing security holders exclusively and no commission or other remuneration
was paid or given directly or indirectly for soliciting such
exchange.
74
In
February 2009, certain holders of the registrant’s 10% Secured Convertible
Debentures converted $601,439 of principal into 601,439 shares of common stock
at $1.00 per share. In addition, those same holders converted
$207,473 of principal amount and accrued interest of certain other debentures
received in 2008 into 244,086 shares of common stock at $0.85 per share. The
registrant relied on section 3(a)(9) of the Securities Act of 1933 to issue the
securities inasmuch as we exchanged the securities with our existing security
holders exclusively and no commission or other remuneration was paid or given
directly or indirectly for soliciting such exchange.
In
February 2009, the registrant issued 94,628 shares of restricted common stock
valued at $1.10 per share to a vendor as settlement for past services rendered.
The registrant relied on section 4(2) of the Securities Act of 1933 to issue the
securities inasmuch as the securities were offered and sold without any form of
general solicitation or general advertising and the offeree made representations
that it was an accredited investor.
On
January 17, 2009, the registrant entered into a two month consulting agreement
with Michael Barrett for consulting services relating to financial management
and reporting. As part of the agreement, Mr. Barrett was granted a
warrant to purchase 2,500 shares of common stock with a term of five years at an
exercise price of $1.25 per share, per month for the term of the agreement. The
registrant relied on Section 4(2) of the Securities Act of 1933 to issue the
securities inasmuch as Mr. Barrett occupied an insider status relative to us
that afforded him effective access to the information registration would
otherwise provide.
In
January 2009, certain holders of the registrant’s 10% Secured Convertible
Debentures converted $50,000 of principal into 50,000 shares of common stock at
$1.00 per share. The registrant relied on section 3(a)(9) of the Securities Act
of 1933 to issue the securities inasmuch as we exchanged the securities with our
existing security holders exclusively and no commission or other remuneration
was paid or given directly or indirectly for soliciting such
exchange.
Between
November 13, 2008 and January 28, 2009, the registrant consummated the sale
of $1,200,000 in aggregate principal amount of its subordinated 10%
Convertible Promissory Notes (the “Notes”), convertible into common stock at a
conversion price of $1.25 per share (the “Conversion Price”), along with
five-year warrants (the “Warrants”) to purchase an aggregate of 960,000 shares
of common stock at an exercise price of $1.25 per share (the “Exercise Price”),
to accredited investors. All outstanding principal and interest of
the Notes is due eleven months from the date of issuance. Out of the total gross
proceeds of the offering, the registrant paid its placement agent $72,000 in
commissions, equal to 6% of the gross proceeds of the offering, and issued to
its placement agent a warrant to purchase 57,600 shares of common stock, equal
to 6% of the number of shares of common stock into which the Notes initially may
be converted, at an exercise price of $1.25 per share. The offering
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the
securities were issued to accredited investors only without any form of general
solicitation or general advertising.
On
November 11, 2008, the registrant entered into a consulting agreement with
Newview Finance LLC (“Newview”), pursuant to which Newview will provide the
registrant with management consulting services, business advisory services,
shareholder information services and public relations services. In
consideration of these services, the registrant issued to Newview a 3-year
Common Stock Purchase Warrant to purchase up to 2,250,000 shares of the
registrant’s common stock, exercisable for cash only at an exercise price of
$1.25 per share (the “Newview Warrant”). The Newview Warrant will vest as
follows: (i) 900,000 of the Newview Warrant shares vested on November 11, 2008,
and (ii) the right to purchase the remaining 1,350,000 of the Newview Warrant
shares vested in equal increments of 270,000 shares on a monthly basis during
the period from December 1, 2008 to April 1, 2009. The
offering of the Newview Warrant and its underlying shares was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, and
Rule 506 of Regulation D promulgated thereunder, inasmuch as the securities were
issued to an accredited investor only without any form of general solicitation
or general advertising.
In
September 2008, the registrant issued $91,290 of additional 10% convertible
debentures to holders of the registrant’s 10% Secured Convertible Debentures for
payment of accrued interest and liquidated damages pursuant to the Consent and
Waivers discussed below. The offering of the securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, and
Rule 506 of Regulation D promulgated thereunder, inasmuch as the securities were
issued to an accredited investor only without any form of general solicitation
or general advertising.
75
On
September 22, 2008 the registrant entered into a Consent and Waiver agreement
(the “September 2008 Consent and Waiver”) with the holders of at least 75% in
aggregate principal amount of its then outstanding 10% Secured Convertible
Debentures. The September 2008 Consent and Waiver allowed the
registrant to pay the interest accrued on the registrant’s 10% Secured
Convertible Debentures for the months of April 1, July 1 and October 1, 2008 as
well as accrued late fees, with the registrant’s securities. Each
holder of 10% Secured Convertible Debentures could accept either shares of the
registrant’s common stock having an agreed upon value of $0.85 or a 10%
Convertible Debenture in payment of these obligations. The 10%
Convertible Debentures accrue interest at the rate of 10% per annum, have a
maturity date of September 12, 2009, and may be converted to common stock at the
rate of $0.85 per share. The offering was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder, inasmuch as the securities were issued to
accredited investors only without any form of general solicitation or general
advertising.
On August
6, 2008 certain holders of our 7.41% Notes converted their notes plus accrued
interest and penalties into 509,648 shares of our common stock and 382,230
warrants. The conversion was executed under a most favored nation provision in
the securities purchase agreement and the noteholders converted on the same term
as the offering described above. We relied on section 3(a)(9) of the Securities
Act of 1933 to issue the securities inasmuch as the notes were exchanged by us
with our existing security holders exclusively, and no commission or other
remuneration was paid or given directly or indirectly for soliciting the
exchange.
In August
2008, certain holders of our 10% Secured Convertible Debentures converted
$300,000 in principal amount and $15,468 of accrued interest, along with accrued
liquidated damages and penalty interest into 315,468 shares of common stock at
$1.00 per share and 86,601 warrants to purchase shares of our common stock at
$1.25 per share. We relied on section 3(a)(9) of the Securities Act of 1933 for
the conversion of the principal and interest, inasmuch as the exchange was made
by our existing security holders exclusively, and no commission or other
remuneration was paid or given directly or indirectly for soliciting the
exchange. We relied on section 4(2) of the Securities Act of 1933 to issue the
securities for the liquidated damages and penalty interest inasmuch as the
securities were offered and sold without any form of general solicitation or
general advertising and the offerees made representations that they were
accredited investors.
On July
15, 2008, we entered into a consulting agreement with Frontier Capital Partners
L.L.C. (“Frontier”) pursuant to which Frontier agreed to provide investor
relations and other business advisory services. The agreement term was 3 months,
but the agreement could be terminated by either party upon 5 days written
notice. The agreement also includes provisions allowing immediate termination in
the event of dissolution, bankruptcy or insolvency and for cause. We agreed to
issue to Frontier 125,000 shares of our restricted common stock as compensation
for these services. 75,000 of these shares were issued immediately (upon
execution of the agreement) and are deemed to be a non-refundable retainer. The
remaining 50,000 shares were issued 46 days after execution of the agreement. We
relied on section 4(2) of the Securities Act of 1933 to issue the securities
inasmuch as the securities were offered and sold without any form of general
solicitation or general advertising.
On June
23, 2008 certain holders of our OID Notes converted their notes plus accrued
interest into 235,104 shares of our common stock and 176,327 warrants. The
conversion was executed under a most favored nation provision in the securities
purchase agreement and the noteholders converted on the same terms as the
offering described above. We relied on section 3(a)(9) of the Securities Act of
1933 to issue the securities inasmuch as the notes were exchanged by us with our
existing security holders exclusively, and no commission or other remuneration
was paid or given directly or indirectly for soliciting the
exchange.
On March
2 2008, the registrant issued a promissory note to a shareholder in the amount
of $160,000. The registrant issued warrants to purchase 40,000 shares of common
stock for consideration for the loan. The warrants may be exercised at a price
of $1.20 per share for a period of 5 years. This note was repaid in July
2008. The offering was exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, inasmuch as the securities were issued
to an accredited investor without any form of general solicitation or general
advertising.
76
On
February 13, 2008 the registrant entered into a Consent and Waiver agreement
(the “February 2008 Consent and Waiver”), which was amended and restated on
August 19, 2008, with the holders of at least 75% in aggregate principal amount
of its then outstanding 10% Secured Convertible Debentures. Pursuant
to the February 2008 Consent and Waiver, as amended and restated, the investors
waived the requirement that the registrant file a second registration statement
(as required by the Registration Rights Agreement dated September 12, 2006) and
waived all liquidated damages that accrued after December 19, 2007 as a result
of that breach. The February 2008 Consent and Waiver, as amended and
restated, allowed the registrant to pay $194,603 in accrued liquidated damages,
as well as the interest accrued on the 10% Secured Convertible Debentures which
was to be paid on January 1, 2008, with the registrant’s
securities. Each holder of 10% Secured Convertible Debentures could
choose to accept either shares of the registrant’s common stock having an agreed
upon value of $0.85 or a 10% Convertible Debenture as payment. The
10% Convertible Debentures accrue interest at the rate of 10% per annum, have a
maturity date of September 12, 2009, and may be converted to common stock at the
rate of $0.85 per share. The offering was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder, inasmuch as the securities were issued to
accredited investors only without any form of general solicitation or general
advertising.
On
February 14, 2008, the registrant entered into a consulting agreement with
Kulman IR. Pursuant to this agreement, Kulman was to provide investor
relations services to the registrant for a period of 12 months in exchange for a
monthly fee of $3,500, the issuance of 100,000 shares of restricted common stock
valued at $100,000, the payment of pre-approved expenses incurred by Kulman in
discharging its obligations under the agreement and
cross-indemnities. The shares of common stock were subject to the
following vesting provisions: 50,000 shares vested upon execution of the
agreement, 25,000 shares vested on August 7, 2008 and the remaining 25,000
shares vested on October 7, 2008. The agreement was terminated on
August 8, 2008, and Kulman IR and its designee returned 25,000 shares to the
registrant for cancellation. The registrant relied on section 4(2) of
the Securities Act of 1933 to issue the securities inasmuch as the securities
were offered and sold without any form of general solicitation or general
advertising and the offeree made representations that it was an accredited
investor.
On
February 12, 2008, the registrant entered into a consulting agreement with New
Castle Consulting. Pursuant to this agreement, New Castle Consulting
provided investor relations services to the registrant for a period of 6 months
in exchange for an immediate payment of $4,500, a monthly fee of $4,500 the
payment of which began in March 2008 and the issuance of 100,000 shares of
restricted common stock valued at $100,000. The registrant relied on
section 4(2) of the Securities Act of 1933 to issue the securities inasmuch as
the securities were offered and sold without any form of general solicitation or
general advertising and the offeree made representations that it was an
accredited investor.
In
January and February 2008, the registrant issued 261,091 shares of common stock
to holders of its 10% Secured Convertible Debentures as partial payment for
liquidated damages in the amount of $119,615 and interest in the amount of
$123,466 accrued on these securities as of December 31, 2007. The
registrant relied on section 4(2) of the Securities Act of 1933 to issue the
securities inasmuch as the securities were offered and sold without any form of
general solicitation or general advertising and the offerees made
representations that they were accredited investors.
In
November and December 2007, we issued 508,406 shares of our common stock in
connection with the conversion of $460,000 in principal and $48,406 in interest
accrued on our 10% Secured Convertible Debentures. We relied on section 3(a)(9)
of the Securities Act of 1933 to issue the securities inasmuch as
the securities were exchanged by us with our existing security holders
exclusively and no commission or other remuneration was paid or given directly
or indirectly for the exchange.
On
October 22, 2007 we entered into an agreement with Oceana Partners pursuant to
which we agreed to issue to Oceana Partners warrants to purchase 400,000 shares
of our common stock in exchange for consulting services. The agreement was
amended on November 30, 2007. Pursuant to the amendment, we agreed to issue
37,500 shares to designees of Oceana Partners and to reduce the number of shares
of common stock covered by the warrants issued to Oceana Partners from 400,000
shares to 362,500 shares. We relied on section 4(2) of the Securities Act of
1933 to issue these securities inasmuch as the securities were offered and sold
without any form of general solicitation or general advertising and the offeree
represented that it was an accredited investor.
On
October 25, 2007 we issued 100,000 shares of our common stock to Richardson
& Patel LLP, our legal counsel, for the payment of legal services.
Richardson & Patel LLP has agreed to sell the common stock and apply the
proceeds against the unpaid balance of the fees we owe. We relied on section
4(2) of the Securities Act of 1933 to issue the securities inasmuch as the
securities were offered and sold without any form of general solicitation or
general advertising and the offeree represented that it was an accredited
investor.
77
On
October 1, 2007 and November 2, 2007 we issued a total of 370,277 shares, having
an agreed upon price of $0.85 per share, as payment for interest and penalties
to holders of our debt securities pursuant to Consent and Waivers discussed
below. We relied on section 4(2) of the Securities Act of 1933 to issue the
securities inasmuch as the securities were offered and sold without any form of
general solicitation or general advertising and the offerees made
representations that they were accredited investors.
On
October 18, 2007, the registrant began a private offering of
units. Each unit consisted of 25,000 shares of common stock and a
five year warrant to purchase 18,750 shares of common stock at an exercise price
of $1.25 per share. The purchase price was $25,000 per
unit. The registrant raised $1,810,000 through this offering by
issuing 1,810,000 shares of common stock and warrants to purchase 1,357,500
shares of common stock. The registrant relied on section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder to issue the
securities inasmuch as the securities were offered and sold without any form of
general solicitation or general advertising and the offerees made
representations that they were accredited investors. During this
offering, certain holders of the registrant’s 7.41% Senior Secured Notes
converted their notes plus accrued interest into 744,749 shares of common stock
and warrants to purchase 558,557 shares of common stock. The
conversion was executed under a most favored nation provision in the securities
purchase agreement. The registrant also permitted the holder of its
10% Secured Convertible Debentures to convert the principal and accrued interest
into 115,468 shares of common stock and a warrant to purchase 86,601 shares of
common stock. The registrant paid its placement agent a retainer
which consisted of warrants to purchase 362,500 shares of common stock at a
price of $1.25 and issued 37,500 shares of common stock. The
registrant also paid its placement agent $ in commissions, equal to 7% of the
gross proceeds of the Offering, and issued to warrants, exercisable at $1.00 per
unit, for the purchase of a total of 196,22 shares of our common stock. The
registrant relied on section 3(a)(9) of the Securities Act of 1933 to issue
these securities inasmuch as the notes were exchanged by the registrant
exclusively with its existing security holders and no commission or other
remuneration was paid or given directly or indirectly for soliciting the
exchange.
On
September 21, 2007 the registrant entered into a Consent and Waiver Agreement
with the holders of at least 75% in aggregate principal amount of its then
outstanding 10% Secured Convertible Debentures. By signing the
Consent and Waiver, the debenture holders permitted the registrant to make
interest payments due on July 1 and October 1, 2007 and to pay $132,726 in
liquidated damages with its securities. The debenture holders were
accredited investors within the meaning of Regulation D under the Securities
Act. These issuances were exempt from registration requirements in
reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder.
On August
15, 2007, we issued to Oceana Partners 50,000 shares of our common stock in
consideration for research coverage valued at $50,000 for a twelve month period
commencing August 1, 2007 thru July 31, 2008. In connection with the issuance of
these securities, Oceana Partners made representations that it was an accredited
investor within the meaning of Regulation D under the Securities Act. The
issuance was exempt from registration requirements in reliance on Section 4(2)
of the Securities Act of 1933, as amended.
In April
2007 the registrant undertook a private offering of units consisting of 7.41%
Senior Secured Notes aggregating $864,000 in principal amount and warrants to
purchase up to 400,000 shares of common stock at an exercise price of $1.20 per
share. As of October 18, 2007, the registrant sold $864,000 of
principal amount of in 7.41% Senior Secured Notes and issued warrants for the
purchase of 400,000 shares of common stock to seven accredited investors,
realizing proceeds of $800,000. The term of the warrants is 10
years. The registrant relied on section 4(2) of the Securities Act of
1933 to issue the securities inasmuch as the securities were offered and sold
without any form of general solicitation or general advertising and the offerees
made representations that they were accredited investors.
On March
23, 2007 the registrant entered into a Consent and Waiver agreement with the
holders of 75% in aggregate principal amount of its then outstanding 10% Secured
Convertible Debentures. By signing the Consent and Waiver, the
debenture holders permitted the registrant to
·
|
sell
additional debt securities, specifically our 7.41% Senior Secured
Notes,
|
78
·
|
make
interest payments on our 10% Secured Convertible Debentures in securities
instead of cash,
|
·
|
pay
liquidated damages arising from the September 12, 2006 Registration Rights
Agreement in securities instead of cash,
and
|
·
|
issue
to Oceana Partners LLC 50,000 shares of common stock and a warrant to
purchase 80,000 shares of common stock, as described
below
|
all
without triggering the 10% Secured Convertible Debenture Holders’ anti-dilution
rights. The registrant issued to the debenture holders warrants to
purchase 150,000 shares of common stock at an exercise price of $1.00 per share
as consideration for the Consent and Waiver. The registrant relied on
section 4(2) of the Securities Act of 1933 to issue the securities inasmuch as
the securities were offered and sold without any form of general solicitation or
general advertising and the offerees made representations that they were
accredited investors.
In
October 2006 the registrant agreed to issue 646,164 shares of common stock to
Mr. Bing Liu, its chief software architect, for his contribution to the
development of the registrant’s products and technology. The value of
the common stock was $1.07 per share. The shares were issued in
reliance on the exemption provided by Section 4(2) of the Securities
Act.
On
October 30, 2006 the registrant’s board of directors and its majority
shareholder approved the CyberDefender Corporation 2006 Equity Incentive Plan
and set aside 1,375,000 shares of common stock for awards under this
plan. To date, the registrant’s Board has approved stock option
awards to for a total of 1,172,394 shares. The terms of the options
vary. The exercise price for the option shares range from $0.85 to
$1.40 per share. The registrant relied on Section 701 of the
Securities Act to make these issuances.
On
October 1, 2006, the registrant issued 186,347 shares of common stock to Mr.
Bing Liu in payment of the balance due on a promissory note issued to Unionway
Int’l LLC. The balance due was $83,335. The shares were
issued in reliance on the exemption provided by Section 4(2) of the Securities
Act of 1933.
On or
about September 12, 2006, the registrant entered into a Securities Purchase
Agreement with 13 accredited investors pursuant to which it sold 10% Secured
Convertible Debentures in the aggregate principal amount of $3,243,378 and
common stock purchase warrants to purchase an aggregate of 3,243,378 shares of
our common stock at $1.00 per share. This aggregate principal amount
of $3,243,378 includes the conversion of $580,878 of principal and accrued
interest of the registrant’s previously outstanding 8% secured notes, as
discussed in the paragraph below. This amount also includes a
subscription by the registrant’s attorneys for $62,500 worth of 10% Secured
Convertible Debentures and warrants, which was paid for by cancelling $62,500 of
indebtedness incurred by the registrant for legal services. The
registrant paid its placement agents $217,000 in commissions, equal to 7% of the
gross proceeds of the Offering, issued 1,000,515 shares of common stock and
issued to its placement agent Unit Purchase Options, exercisable at $1.00 per
unit, for the purchase of a total of 217,000 shares of our common stock along
with warrants for the purchase of 217,000 shares of our common stock at $1.00
per share, equal to 7% of the gross proceeds of the Offering. The registrant
relied on section 4(2) of the Securities Act of 1933 to issue the securities
inasmuch as the securities were offered and sold without any form of general
solicitation or general advertising and the offerees made representations that
they were accredited investors.
Item
27. Exhibits.
3.1
|
Articles
of incorporation of the registrant, as amended (1)
|
|
3.2
|
Bylaws
of the registrant, as amended (1)
|
|
5.1
|
Opinion
of Richardson & Patel LLP **
|
|
10.1
|
2005
Stock Incentive Plan (2)
|
|
10.2
|
Amended
and Restated 2006 Equity Incentive Plan (1)
|
|
10.3
|
|
Securities
purchase agreement between registrant and each purchaser identified on the
signature pages thereof dated as of September 12, 2006
(2)
|
79
10.4
|
Employment
agreement between the registrant and Gary Guseinov dated August 31, 2006
(2)
|
|
10.5
|
Employment
agreement between the registrant and Igor Barash dated September 1, 2003
(2)
|
|
10.6
|
Form
of Securities Purchase Agreement dated September 12, 2006 (1)
|
|
10.7
|
Form
of 10% Secured Convertible Debenture dated September 12, 2006 (1)
|
|
10.8
|
Form
of Registration Rights Agreement dated September 12, 2006 (1)
|
|
10.9
|
Form
of Warrant dated September 12, 2006 (1)
|
|
10.10
|
Form
of Security Agreement dated September 12, 2006 (1)
|
|
10.11
|
Form
of Subsidiary Guarantee dated September 12, 2006 (1)
|
|
10.12
|
Form
of Escrow Agreement dated September 12, 2006 (1)
|
|
10.13
|
Form
of Indemnification Agreement entered into between the registrant and Mr.
Guseinov, Mr. Eckelberry, Mr. Ivankovich, Mr. Liu, Mr. Barash, Mr.
LaValle, Mr. Barrett and Mr. Harris (1)
|
|
10.14
|
Indemnification
Agreement, dated as of July 21, 2009, between CyberDefender Corporation
and Bennet Van De Bunt (20)
|
|
10.15
|
Agreement
to Defer Piggyback Registration Rights dated September 12, 2006 (1)
|
|
10.16
|
Form
of Note Conversion and Warrant Lock-Up Agreement (1)
|
|
10.17
|
Amendment
to Registration Rights Agreement dated October 11, 2006 between the
registrant and the purchasers of the registrant’s 10% Secured Convertible
Debentures (1)
|
|
10.18
|
Consent
and Waiver dated as of March 23, 2007 between the registrant and the
holders of the 10% Convertible Debentures dated September 12, 2006 (3)
|
|
10.19
|
Consent
and Waiver dated as of September 21, 2007 between the registrant and the
holders of the 10% Convertible Debentures dated September 12, 2006 (4)
|
|
10.20
|
Lease
Agreement dated October 19, 2007 between the registrant and 617 7th
Street Associates, LLC (5)
|
|
10.21
|
Independent
Contractor Agreement dated January 28, 2008 between the registrant and
Michael Barrett (6)
|
|
10.22
|
Form
of Securities Purchase Agreement executed in conjunction with the sale of
Units beginning in October 2007 (6)
|
|
10.23
|
Form
of Warrant to Purchase Common Stock executed in conjunction with the sale
of Units beginning in October 2007 (6)
|
|
10.24
|
Form
of Escrow Agreement executed in conjunction with the sale of Units
beginning in October 2007(6)
|
|
10.25
|
Consulting
Agreement with New Castle Consulting LLC dated February 12, 2008 (7)
|
|
10.26
|
Investor
Relations Agreement dated February 14, 2008 between the registrant and
Kulman IR, LLC (7)
|
|
10.27
|
Form
of 7.41% Senior Secured Note (8)
|
|
10.28
|
Form
of Registration Rights Agreement executed in conjunction with the sale of
7.41% Senior Secured Notes
(8)
|
|
10.29
|
Form
of Amended and Restated Security Agreement executed in conjunction with
the sale of 7.41% Senior Secured Notes (8)
|
|
10.30
|
Form
of Securities Purchase Agreement executed in conjunction with the sale of
7.41% Senior Secured Notes
(8)
|
|
10.31
|
Form
of Common Stock Purchase Warrant issued in conjunction with the sale of
7.41% Senior Secured Notes
(8)
|
|
10.32
|
Agreement
for Internet Advertising Agent Services dated May 16, 2008 between the
registrant and WebMetro (9)
|
|
10.33
|
Form
of Securities Purchase Agreement executed in conjunction with the sale of
Units beginning in June 2008 (10)
|
|
10.34
|
Form
of Warrant to Purchase Common Stock executed in conjunction with the sale
of Units beginning in June 2008 (10)
|
|
10.35
|
Consent
and Waiver dated as of February 13, 2008 and amended on August 19, 2008
between the registrant and the holders of the 10% Convertible Debentures
dated September 12, 2006
(11)
|
|
10.36
|
Consulting
Agreement with Frontier Capital Partners LLC dated July 15, 2008 (12)
|
|
10.39
|
Consent
and Waiver dated as of September 22, 2008 between the registrant and the
holders of the 10% Convertible Debentures dated September 12, 2006 (11)
|
|
10.40
|
Consulting
Agreement dated November 11, 2008 between the registrant and Newview
Finance LLC
(13)
|
|
10.41
|
Common
Stock Purchase Warrant dated November 10, 2008 issued to Newview Finance
LLC (13)
|
|
10.42
|
Independent
Contractor Agreement dated December 1, 2008 between the registrant and
Kevin Harris (14)
|
|
10.43
|
Form
of Securities Purchase Agreement dated November 25, 2008 (15)
|
|
10.44
|
Form
of Registration Rights Agreement dated November 25, 2008 (15)
|
|
10.45
|
Form
of 10% Convertible Promissory Note dated November 25, 2008 (15)
|
80
10.46
|
Form
of Common Stock Purchase Warrant dated November 25, 2008 (15)
|
|
10.47
|
Form
of Subordination Agreement dated November 25, 2008 (15)
|
|
10.48
|
Consent
and Waiver Agreement dated November 21, 2008 between the registrant and
the holders of at least 75% of the outstanding principal amount of the
2006 Debentures (15)
|
|
10.49
|
Settlement
Agreement between the registrant and Patrick Hinojosa (16)+
|
|
10.50
|
Employment Agreement between the
registrant and Kevin Harris (17)
|
|
10.51
|
Amendment
to Lease Agreement dated January 30, 2009 between the registrant and 617
7th
Street Associates, LLC (17)
|
|
10.52
|
Media
and Marketing Services Agreement with GR Match, LLC (17)
|
|
10.53
|
Form of Consulting Agreement with
SCP Holding LLC dated April 1, 2009 (18)
|
|
10.54
|
Form
of Consent and Waiver dated April 23, 2009 between the registrant and the
holders of the 10% Secured Convertible Debentures dated September 12, 2006
(18)
|
|
10.55
|
Securities
Purchase Agreement dated June 3, 2009 between the registrant and GR Match
LLC (19)
|
|
10.56
|
First
Amendment dated June 4, 2009 to Media and Marketing Services Agreement
between the registrant and GR Match LLC (19)
|
|
10.57
|
Securities
Purchase Agreement dated June 10, 2009 between the registrant and Shimski
L.P. (18)
|
|
10.58
|
Warrant
to Purchase Common Stock issued to GR Match LLC (18)
|
|
10.59
|
Warrant
to Purchase Common Stock issued to GR Match LLC (18)
|
|
10.60
|
Amended
and Restated Warrant to Purchase Common Stock issued to GR Match LLC (18)
|
|
23.1
|
Consent
of KMJ Corbin & Company LLP*
|
|
23.2
|
|
Consent
of Richardson & Patel LLP (See Exhibit
5.1)**
|
*Filed
herewith.
**Previously filed.
+Portions
of this agreement have been redacted pursuant to a request for confidential
treatment which was granted by the Securities and Exchange Commission on
September 25, 2008.
(1)
Incorporated by reference from the registrant’s Registration Statement on Form
SB-2, file no. 333-138430, filed with the Securities and Exchange Commission on
November 3, 2006.
(2)
Incorporated by reference from the registrant’s Registration Statement on Form
SB-2/A, filed with the Securities and Exchange Commission on February 1,
2007.
(3)
Incorporated by reference from the registrant’s Registration Statement on Form
SB-2/A, filed with the Securities and Exchange Commission on March 30,
2007.
(4)
Incorporated by reference from the registrant’s Quarterly Report on Form 10QSB,
filed with the Securities and Exchange Commission on November 16,
2007.
(5)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on November 19,
2007.
(6)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on February 8,
2008.
(7)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 5, 2008.
(8)
Incorporated by reference from the registrant’s Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on April 15, 2008.(9)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on June 5, 2008.
(10)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on September 3,
2008.
(11)
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q,
filed with the Securities and Exchange Commission on November 14,
2008.
(12)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on July 22, 2008.
(13)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on November 18,
2008.
(14) Incorporated
by reference from the registrant’s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on January 15, 2009.
(15)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on December 5,
2008.
(16)
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q,
filed with the Securities and Exchange Commission on August 14, 2008. This
document is the subject of a confidential treatment request therefore portions
of it have been redacted. A full copy of the document has been filed separately
with the Securities and Exchange Commission.
(17)
Incorporated by reference from the registrant’s Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 31,
2009.
(18)
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q,
filed with the Securities and Exchange Commission on August 14,
2009.
(19)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on June 10, 2009.
(20)
Incorporated by reference from the registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on July 27,
2009.
81
Item
28. Undertakings.
The
undersigned registrant hereby undertakes:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
|
i.
|
To
include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
|
|
ii.
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing,, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in
the effective registration statement;
and
|
|
iii.
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement.
|
2. That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of
offering.
4. If the registrant is subject to Rule
430C, each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first
use.
5. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
82
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this Amendment No. 2 to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Los Angeles, State of California on
October 30, 2009.
CYBERDEFENDER
CORPORATION
|
|
By:
|
/s/ Gary Guseinov
|
Gary
Guseinov
|
|
Chief
Executive Officer
|
By:
|
/s/ Kevin Harris
|
Kevin
Harris
|
|
Chief Financial
Officer
|
Pursuant
to the requirements of the Securities Act of 1933, this Amendment No. 2 has been
signed by the following persons in the capacities and on the dates
indicated:
Name
|
Title
|
Date
|
||
/s/
Gary Guseinov
|
Chief
Executive Officer and Chairman of
|
October
30, 2009
|
||
Gary
Guseinov
|
the
Board (Principal Executive Officer)
|
|||
/s/
Kevin Harris
|
Chief
Financial Officer and Director (Principal
|
October
30, 2009
|
||
Kevin
Harris
|
Financial
and Accounting Officer)
|
|||
/s/
Igor Barash
|
Chief
Information Officer, Director
|
October
30, 2009
|
||
Igor
Barash
|
|
|
83
CYBERDEFENDER
CORPORATION
INDEX
TO FINANCIAL STATEMENTS
Page
Number
|
||
Condensed
Balance Sheets - June 30, 2009 and December 31, 2008
|
F-2
|
|
Condensed
Statements of Operations - Three and Six Months Ended June 30, 2009 and
June 30, 2008
|
F-3
|
|
Condensed
Statements of Cash Flows - Six Months Ended June 30, 2009 and June 30,
2008
|
F-4
|
|
Notes
to Condensed Financial Statements
|
F-6
|
|
Report
of Independent Registered Public Accounting Firm
|
F-25
|
|
Balance
Sheets – December 31, 2008 and 2007
|
F-26
|
|
Statements
of Operations - For the Years Ended December 31, 2008 and
2007
|
F-27
|
|
Statements
of Stockholders’ Deficit - For the Years Ended December 31, 2008 and
2007
|
F-28
|
|
Statements
of Cash Flows - For the Years Ended December 31, 2008 and
2007
|
F-29
|
|
Notes
to the Financial Statements
|
F-31
|
F-1
CYBERDEFENDER
CORPORATION
CONDENSED
BALANCE SHEETS
June
30,
|
December
31,
|
|||||||
2009
|
2008(1)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 2,159,478 | $ | 779,071 | ||||
Restricted
cash
|
647,487 | 15,000 | ||||||
Accounts
receivable
|
151,397 | 204,635 | ||||||
Deferred
financing costs
|
72,945 | 324,200 | ||||||
Prepaid
expenses
|
536,756 | 674,478 | ||||||
Deferred
charges, current
|
1,807,706 | 811,542 | ||||||
Total
Current Assets
|
5,375,769 | 2,808,926 | ||||||
PROPERTY
AND EQUIPMENT, net
|
81,354 | 94,883 | ||||||
DEFERRED
CHARGES, less current portion
|
793,000 | 239,983 | ||||||
OTHER
ASSETS
|
32,559 | 26,196 | ||||||
Total
Assets
|
$ | 6,282,682 | $ | 3,169,988 | ||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 3,314,268 | $ | 3,798,645 | ||||
Accrued
expenses
|
411,999 | 331,229 | ||||||
Accrued
expenses - registration rights agreement
|
48,223 | 53,745 | ||||||
Deferred
revenue, current
|
6,759,820 | 4,025,026 | ||||||
Convertible
notes payable, net of discount
|
1,772,726 | 2,421,529 | ||||||
Capital
lease obligation, current
|
19,039 | 27,291 | ||||||
Total
Current Liabilities
|
12,326,075 | 10,657,465 | ||||||
DEFERRED
REVENUE, less current portion
|
1,379,564 | 527,927 | ||||||
CAPITAL
LEASE OBLIGATION, less current portion
|
11,982 | 16,776 | ||||||
Total
Liabilities
|
13,717,621 | 11,202,168 | ||||||
STOCKHOLDERS’
DEFICIT:
|
||||||||
Common
stock, no par value; 50,000,000 shares authorized; 23,193,179 and
17,350,798 shares issued and outstanding at June 30, 2009 and December 31,
2008, respectively
|
13,497,302 | 6,381,921 | ||||||
Additional
paid-in capital
|
13,789,171 | 11,398,623 | ||||||
Accumulated
deficit
|
(34,721,412 | ) | (25,812,724 | ) | ||||
Total
Stockholders’ Deficit
|
(7,434,939 | ) | (8,032,180 | ) | ||||
Total
Liabilities and Stockholders’ Deficit
|
$ | 6,282,682 | $ | 3,169,988 |
(1)
|
Derived
from audited financial statements
|
See
accompanying notes to condensed financial statements
F-2
CYBERDEFENDER
CORPORATION
CONDENSED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES:
|
||||||||||||||||
Net
sales
|
$ | 3,686,644 | $ | 742,862 | $ | 6,878,274 | $ | 1,217,908 | ||||||||
COST
OF SALES
|
753,324 | 193,240 | 1,433,028 | 267,225 | ||||||||||||
GROSS
PROFIT
|
2,933,320 | 549,622 | 5,445,246 | 950,683 | ||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Advertising
|
3,408,307 | 1,001,505 | 7,152,001 | 1,281,891 | ||||||||||||
Product
development
|
365,497 | 93,893 | 665,234 | 203,861 | ||||||||||||
Selling,
general and administrative
|
1,565,995 | 737,176 | 2,817,552 | 1,363,106 | ||||||||||||
Investor
relations and other related consulting
|
1,346,207 | - | 2,566,209 | 200,000 | ||||||||||||
Depreciation
and amortization
|
9,760 | 9,828 | 20,096 | 19,656 | ||||||||||||
Total
Operating Expenses
|
6,695,766 | 1,842,402 | 13,221,092 | 3,068,514 | ||||||||||||
LOSS
FROM OPERATIONS
|
(3,762,446 | ) | (1,292,780 | ) | (7,775,846 | ) | (2,117,831 | ) | ||||||||
OTHER
INCOME/(EXPENSES):
|
||||||||||||||||
Change
in the value of derivative liabilities
|
- | - | 109,058 | - | ||||||||||||
Loss
on registration rights agreement
|
- | (216,540 | ) | - | (216,540 | ) | ||||||||||
Interest
income
|
11 | - | 11 | - | ||||||||||||
Interest
expense
|
(1,052,932 | ) | (524,913 | ) | (1,965,441 | ) | (1,175,697 | ) | ||||||||
Total
Other Expenses, net
|
(1,052,921 | ) | (741,453 | ) | (1,856,372 | ) | (1,392,237 | ) | ||||||||
LOSS
BEFORE INCOME TAX EXPENSE
|
(4,815,367 | ) | (2,034,233 | ) | (9,632,218 | ) | (3,510,068 | ) | ||||||||
INCOME
TAX EXPENSE
|
200 | 200 | 400 | 400 | ||||||||||||
NET
LOSS
|
$ | (4,815,567 | ) | $ | (2,034,433 | ) | $ | (9,632,618 | ) | $ | (3,510,468 | ) | ||||
Basic
and diluted net loss per share
|
$ | (0.24 | ) | $ | (0.14 | ) | $ | (0.50 | ) | $ | (0.24 | ) | ||||
Weighted
Average Shares Outstanding:
|
||||||||||||||||
Basic
and diluted
|
20,392,487 | 14,703,974 | 19,198,137 | 14,497,357 |
See
accompanying notes to condensed financial statements
F-3
CYBERDEFENDER
CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six
Months Ended
|
||||||||
June
30,
2009
|
June
30,
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (9,632,618 | ) | $ | (3,510,468 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Loss
on registration rights agreement
|
- | 216,540 | ||||||
Amortization
of debt discount
|
783,294 | 607,947 | ||||||
Depreciation
and amortization
|
20,096 | 19,656 | ||||||
Compensation
expense from vested stock options
|
141,637 | 117,853 | ||||||
Amortization
of deferred financing costs
|
302,752 | 375,169 | ||||||
Shares
and warrants issued for penalties and interest
|
295,722 | 243,081 | ||||||
Shares
and warrants issued for services
|
2,206,248 | 200,000 | ||||||
Warrants
issued in connection with warrant tender offer
|
500,630 | - | ||||||
Change
in value of derivative liabilities
|
(109,058 | ) | - | |||||
Changes
in operating assets and liabilities:
|
||||||||
Restricted
cash
|
(632,487 | ) | - | |||||
Accounts
receivable
|
53,238 | (96,661 | ) | |||||
Prepaid
expenses
|
137,722 | (6,604 | ) | |||||
Deferred
charges
|
(1,549,181 | ) | (46,496 | ) | ||||
Other
assets
|
(6,363 | ) | 1 | |||||
Accounts
payable and accrued expenses
|
(409,129 | ) | 431,983 | |||||
Deferred
revenue
|
3,586,431 | 1,044,447 | ||||||
Cash
Flows Used In Operating Activities:
|
(4,311,066 | ) | (403,552 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of fixed assets
|
(6,567 | ) | - | |||||
Cash
Flows Used In Investing Activities
|
(6,567 | ) | - | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from convertible notes payable and notes payable, net of placement
fees
|
621,700 | 160,000 | ||||||
Principal
payment of notes payable
|
- | (189,000 | ) | |||||
Proceeds
from exercise of stock options
|
83,086 | - | ||||||
Proceeds
from exercise of warrants, net of placement fees
|
1,899,420 | - | ||||||
Principal
payments on capital lease obligation
|
(13,046 | ) | (11,698 | ) | ||||
Proceeds
from sale of stock, net of placement fees
|
3,106,880 | 529,000 | ||||||
Cash
Flows Provided by Financing Activities
|
5,698,040 | 488,302 | ||||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
1,380,407 | 84,750 | ||||||
CASH
AND CASH EQUIVALENTS, beginning of period
|
779,071 | 236,995 | ||||||
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 2,159,478 | $ | 321,745 |
See
accompanying notes to condensed financial statements
F-4
CYBERDEFENDER
CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six
Months Ended
|
||||||||
June
30,
2009
|
June
30,
2008
|
|||||||
Supplemental
disclosures of cash flow information:
|
||||||||
Income
taxes paid
|
$ | 800 | $ | - | ||||
Cash
paid for interest
|
$ | 67,317 | $ | 21,099 | ||||
Supplemental
schedule of non-cash financing activities:
|
||||||||
Property
and equipment acquired through capital lease obligation
|
$ | - | $ | 2,362 | ||||
Discount
on note payable
|
$ | 178,602 | $ | 36,092 | ||||
Warrants
issued in connection with sale of stock
|
$ | - | $ | 389,496 | ||||
Conversion
of notes payable to common stock
|
$ | 1,908,495 | $ | 235,101 | ||||
Cumulative
effect of accounting change to accumulated deficit for derivative
liabilities
|
$ | 723,930 | $ | - | ||||
Warrants
issued for placement fees with convertible debt
|
$ | 18,197 | $ | - |
See
accompanying notes to condensed financial statements
F-5
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 - INTERIM FINANCIAL STATEMENTS
These
unaudited interim financial statements have been prepared by CyberDefender
Corporation (the “Company”) pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”) for interim financial statements. The
information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments) that are, in the opinion of management,
necessary to fairly present the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) have been omitted pursuant to
such rules and regulations. These unaudited interim financial statements should
be read in conjunction with the audited financial statements and footnotes for
the Company for its year ended December 31, 2008 included in the Company’s
Annual Report on Form 10-K. The results for the six-month interim period ended
June 30, 2009 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2009.
NOTE
2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and
Business
The
Company, based in Los Angeles, California, is a provider of secure content
management software. The Company develops, markets and licenses security
software and related services. The Company’s goal is to bring to market advanced
solutions to combat and prevent identity theft, spyware, viruses, and related
computer threats. The Company markets its products directly to
consumers.
Going Concern and
Management’s Plans
Historically,
the Company’s revenues were derived from the sales of, and ongoing subscriptions
for, a single product. The Company’s management determined that the Company
needed to offer a full line of products to be able to grow and compete. In
November 2006, the Company launched the first of its current product line, a new
Internet security suite called CyberDefender FREE 2.0 that is free to the
subscriber. Revenues are earned from advertising networks which pay the Company
to display advertisements inside the software. CyberDefender Early Detection
Center is a version of the same software, without the advertising, which is paid
for by the subscriber. The annual subscription rate for the version without ads
ranges from $12.99 to $49.99, depending on the marketing or distribution
channels used by the Company.
On
September 27, 2007, the Company announced the launch of CyberDefenderULTIMATE
and CyberDefenderCOMPLETE. These are enhanced versions of its
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 a one-time fix to a customer’s
computer and year-round unlimited anti-malware support for a subscriber’s
computer. These new security suites also include 2 gigabytes of
online backup. These products are sold for $99.95 to $299.99,
depending on the marketing or distribution channels used by the
Company.
In August
2008, the Company announced the launch of its 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 used by the Company.
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 used by the
Company.
The
Company’s interim financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses on a GAAP basis of $9,632,618 during the six months ended
June 30, 2009; however, as reflected on the Statement of Cash Flows, the
Company’s cash used in operations was $4,311,066 during the six months ended
June 30, 2009. In addition, at June 30, 2009, the Company has
negative working capital of $6,950,306, a large portion of which relates to
deferred revenue, and an accumulated deficit of $34,721,412, a large portion of
which relates to non-cash charges for the value of equity issued over the
years. These items raise substantial doubt about the Company’s
ability to continue as a going concern. The Company is confident that the recent
increases in sales volume, as evidenced by sales receipts year to date of more
than $10 million, will provide the Company with a significant renewable revenue
stream related to the ongoing license renewals of thousands of customers that
the Company is acquiring every month. However, until these renewals along with
new sales of the products provide the Company with the revenue it needs to
attain profitability, the Company intends to continue to raise money for
operating capital through the sale or exercise of its securities or by borrowing
money. From inception through June 30, 2009, the Company has raised
$6,735,000 from debt financing, $4,916,880 from equity financing and
$1,968,311 from the exercise of warrants in connection with the Company’s
warrant tender offer. These funds have been used to develop software, improve
and expand its infrastructure and to build out a management team. The Company’s
ability to continue as a going concern is dependent upon its ability to develop
additional sources of capital. Management cannot assure that any future
financing arrangements will be available in amounts or on terms acceptable to
the Company. If additional future financing is not available or is not available
on acceptable terms, the Company may be unable to continue its operations. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The
Company currently has no firm agreements with any third parties for any future
transactions and future financings.
F-6
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification
To
conform to the current year’s presentation, as a result of management’s
continuing analysis of its operating activities, the Company reclassified
$193,240 and $267,225 for the three and six months ended June 30, 2008,
respectively, related to amounts previously classified as operating expense to
costs of sales with no effect on previously reported net loss. In
addition, the Company reclassified $0 and $200,000 for the three and six months
ended June 30, 2008, respectively, related to amounts previously classified as
selling, general & administrative to investor relations and other related
consulting expense with no effect on previously reported net loss. In addition,
the Company reclassified $23,527 and $34,825 for the three and six months ended
June 30, 2008, respectively, related to amounts previously classified as
selling, general & administrative to advertising expense with no effect on
previously reported net loss. Additionally, the Company reclassified $15,000
from prepaid expenses to restricted cash at December 31, 2008.
Use of
Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by management are, among
others, realization of accounts receivables, recoverability of prepaid expenses,
deferred charges and long-lived assets, value of shares and options/warrants
granted, valuation of derivative liabilities and valuation of deferred tax
assets. Actual results could differ from those estimates and
assumptions.
Cash and Cash
Equivalents
Cash and
cash equivalents include cash on hand and investments with original maturities
of three months or less.
Property and
Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance, and repairs
are charged to expense as incurred. When equipment is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in the results of operations for the
respective period. Depreciation is provided over the estimated useful lives of
the related assets ranging from three to seven years, using the straight-line
method.
Equipment under Capital
Lease
The
Company leases certain of its furniture and other equipment under agreements
accounted for as capital leases. The assets and liabilities under capital lease
are recorded at the lesser of the present value of aggregate future minimum
lease payments, including estimated bargain purchase options, or the fair value
of the assets under lease. Assets under capital lease are depreciated using the
straight-line method over their estimated useful lives.
Fair Value of Financial
Instruments
Unless
otherwise specified, the Company believes the carrying value of financial
instruments approximates their fair value.
Revenue
Recognition
The
Company recognizes revenue from the sale of software licenses under the guidance
of Statement of Position (“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”) No. 101 “Revenue Recognition in Financial
Statements” as amended by SAB 104.
Specifically,
the Company recognizes revenues from its products when all of the following
conditions for revenue recognition are met:
i.
|
persuasive
evidence of an arrangement exists,
|
|
ii.
|
the
product or service has been delivered,
|
|
iii.
|
the
fee is fixed or determinable, and
|
|
iv.
|
collection
of the resulting receivable is reasonably
assured.
|
The
Company currently sells five products, CyberDefender Early Detection Center
(“EDC”), an antivirus and anti spyware software, CyberDefender Registry Cleaner,
CyberDefenderULTIMATE, CyberDefenderCOMPLETE and Identity Protection Services,
over the Internet. The Company also offers a backup CD of the EDC software for
an additional fee. CyberDefenderCOMPLETE offers 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 the Company. Upon receipt of authorization from the credit card
issuer, the Company provides technical support if the customer purchased
CyberDefenderULTIMATE or CyberDefenderCOMPLETE and licenses the customer to
download EDC over the Internet. As part of the sales price, the Company provides
renewable product support and content updates, which are separate components of
product licenses and sales. Term licenses allow customers to use the Company’s
products and receive product support coverage and content updates for a
specified period, generally twelve months. The Company invoices 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, CyberDefender Registry Cleaner and for the portion of the
sale of CyberDefenderCOMPLETE that relates to the one-time technical support as
the Company believes that all of the elements necessary for revenue recognition
have occurred.
F-7
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
Company also uses third parties to sell its software and therefore evaluates the
criteria of Financial Accounting Standards Board (“FASB”) Emerging Issues Task
Force (“EITF”) 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. The
Company is the primary obligor, is subject to inventory risk, has latitude in
establishing prices and selecting suppliers, establishes product specifications,
and has the risk of loss. Accordingly, the Company’s revenue is recorded on a
gross basis.
The
Company also offers 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, the Company
recognizes 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 Company
obligations remain at the end of a period and collection of the resulting
receivable is probable. The Company’s obligations do not include guarantees of a
minimum number of impressions.
Deferred
Charges
The
Company uses a third party to provide technical support services associated with
the CyberDefenderCOMPLETE and CyberDefenderULTIMATE products. The
costs associated with this service are deferred and amortized against the
recognition of the related sales revenue.
In
addition, the Company uses third parties to process a portion of its product
renewal sales. The Company pays a direct acquisition fee to the processor 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 fee 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
December 31, 2008, the Company had $0 accrued for customer returns and
chargebacks, based on historical returns.
Concentrations of
Risk
Revenues
are concentrated in the software industry which is highly competitive and
rapidly changing. Significant technological changes in the industry or customer
requirements, or the emergence of competitive products with new technologies or
capabilities could adversely affect operating results.
As of
June 30, 2009, all of our cash and cash equivalents were maintained at a major
financial institution in the United States. At times, deposits held with the
financial institution may exceed the amount of insurance provided on such
deposits. Generally, these deposits may be redeemed upon demand and, therefore,
are believed to bear low risk. Effective October 3, 2008, the Emergency Economic
Stabilization Act of 2008 raised the Federal Deposit Insurance Corporation
deposit coverage limits to $250,000 per owner from $100,000 per owner. This
program is currently available through December 31, 2009. As of June
30, 2009, the Company had a balance of approximately $2,173,000 in excess of the
FDIC limit.
Advertising
expenses are expensed as incurred and consist primarily of various forms of
media purchased from Internet-based marketers and search engines. 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.
F-8
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income
Taxes
The
Company has adopted the liability method of accounting for income taxes pursuant
to Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for
Income Taxes.” Under SFAS No. 109, deferred income taxes are recorded to reflect
tax consequences on future years for the differences between the tax basis of
assets and liabilities and their financial reporting amounts at each year-end.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Deferred
income tax expense represents the change during the period in the deferred tax
assets and deferred tax liabilities. The components of the deferred tax assets
and liabilities are individually classified as current and non-current based on
their characteristics. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FIN 48 prescribes
recognition thresholds that must be met before a tax position is recognized in
the financial statements and provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Under FIN 48, an entity may only recognize or
continue to recognize tax positions that meet a “more likely than not”
threshold. The Company did not make any adjustment to opening retained earnings
as a result of the implementation.
Based on
its evaluation, the Company has concluded that there are no significant
uncertain tax positions requiring recognition in its financial statements. The
Company’s evaluation was performed for the tax years ended December 31,
2004 through 2008 for U.S. Federal Income Tax and for the tax years ending
December 31, 2003 through 2008 for the State of California Income
Tax.
The
Company does not have any unrecognized tax benefits as of June 30, 2009 that, if
recognized, would affect the Company’s effective income tax rate.
The
Company’s policy is to recognize interest and penalties related to income tax
issues as components of income tax expense. The Company did not recognize or
have any accrual for interest and penalties relating to income taxes as of June
30, 2009.
Software Development
Costs
The
Company accounts 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. There have been 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
expense.
Recently Issued Accounting
Pronouncements
The
Company has adopted all accounting pronouncements effective before June 30, 2009
which are applicable to the Company.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”
(“SFAS 141R”). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. This statement is effective for
the Company beginning January 1, 2009. The Company is evaluating the impact
SFAS141R will have on any future business combinations.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles — a replacement of FASB Statement No. 162, which
approved the FASB Accounting Standards Codification (“Codification”) as the
single source of authoritative United States accounting and reporting standards
for all non-governmental entities, except for guidance issued by the SEC. The
Codification, which changes the referencing of financial standards, is effective
for interim or annual financial periods ending after September 15, 2009.
Therefore, beginning with our third quarter of fiscal 2009, all references made
to GAAP will use the new Codification numbering system prescribed by the FASB.
As the Codification is not intended to change or alter existing GAAP, it is not
expected to have any impact on our financial statements.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R), which amends the consolidation guidance applicable to
variable interest entities (“VIEs”). The scope within the guidance now includes
qualifying special-purpose entities. The standard provides revised guidance on
(1) determining the primary beneficiary of the VIE, (2) how power is
shared, (3) consideration for kick-out, participating and protective
rights, (4) reconsideration of the primary beneficiary,
(5) reconsideration of a VIE, (6) fees paid to decision makers or
service providers, and (7) presentation requirements. The statement is
effective as of the first quarter of our fiscal 2011, and early adoption is
prohibited. We do not expect the adoption of this standard to have any impact on
our financial statements.
F-9
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting
Pronouncements (Continued)
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.
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 warrant and note
holders, 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.
F-10
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss Per
Share
In
accordance with SFAS No. 128, “Earnings Per Share”, the basic loss per
common share is computed by dividing net loss available to common stockholders
by the weighted average number of common shares outstanding. Diluted loss
per common share is computed similar to basic loss per common share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. As of June 30, 2009 and 2008,
there were 15,352,948 and 10,745,886 shares of potentially dilutive securities
outstanding, respectively. As the Company reported a net loss, none of the
potentially dilutive securities were included in the calculation of diluted
earnings per share since their effect would be anti-dilutive for that reporting
period.
Stock Based
Compensation
The
Company applies SFAS No. 123 (Revised 2004), “Share Based Payment”
(“SFAS No. 123R”), which 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. For non-employee stock based compensation, the
Company recognizes an expense in accordance with SFAS No. 123 and values
the equity securities based on the fair value of the security on the date of
grant. For stock-based awards the value is based on the market value of the
stock on the date of grant or the value of services, whichever is more readily
available. Stock option awards are valued using the Black-Scholes option-pricing
model.
The
Company accounts for equity instruments issued to consultants and vendors in
exchange for goods and services in accordance with the provisions of EITF Issue
No. 96-18, “Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services”, and
EITF Issue No. 00-18, “Accounting Recognition for Certain Transactions Involving
Equity Instruments Granted to Other than Employees”. The measurement date for
the fair value of the equity instruments issued is determined at the earlier of
(i) the date at which a commitment for performance by the consultant or vendor
is reached or (ii) the date at which the consultant or vendor’s performance is
complete. In the case of equity instruments issued to consultants, the fair
value of the equity instrument is recognized over the term of the consulting
agreement.
In
accordance with EITF Issue No. 00-18, an asset acquired in exchange for the
issuance of fully vested, non-forfeitable equity instruments should not be
presented or classified as an offset to equity on the grantor’s balance sheet
once the equity instrument is granted for accounting purposes. Accordingly, the
Company records the fair value of the fully vested, non-forfeitable common stock
issued for future consulting services as prepaid expense in its balance
sheet.
NOTE
3 – RESTRICTED CASH
Under a
credit card processing agreement with a financial institution the Company is
required to maintain a security reserve deposit as collateral. The
amount of the deposit is at the discretion of the financial institution and as
of June 30, 2009 and December 31, 2008 was $397,476 and $15,000, respectively.
Under a separate credit card processing agreement with a financial institution
the Company is required to issue a $250,000 letter of credit as a security
deposit. The letter of credit is collateralized by cash held in an
account at the Company’s bank. The account is interest bearing and the Company
receives the interest that is earned. The balance in the cash collateral account
was $250,011 and $0 as of June 30, 2009 and December 31, 2008,
respectively.
NOTE
4 - STOCKHOLDERS’ DEFICIT
Common
Stock
On
October 18, 2007, the Company began an offering of units. Each unit consisted of
25,000 shares of common stock and a warrant to purchase 18,750 shares of common
stock at an exercise price of $1.25 per share. The warrants have a term of five
years. Pursuant to the warrant agreements, from and after the warrant issue
date, in the event the Company sells common stock for less than the exercise
price or issues securities convertible into or exercisable for common stock at a
conversion price or exercise price less than the exercise price (a “Dilutive
Issuance”), then the exercise price shall be multiplied by a fraction, the
numerator of which is the number of shares of common stock sold and issued at
the closing of such Dilutive Issuance plus the number of shares which the
aggregate offering price of the total number of shares of common stock sold and
issued at the closing of such Dilutive Issuance would purchase at the exercise
price, and the denominator of which is the number of shares of common stock
issued and outstanding on the date of such Dilutive Issuance plus the number of
additional shares of common stock sold and issued at the closing of such
Dilutive Issuance. As of April 1, 2009, the holders of the warrants have waived
their rights to any adjustments to the exercise price as a result of a Dilutive
Issuance (see Note 2). The purchase price was $25,000 per unit.
F-11
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT (Continued)
During
February and March 2008, the Company raised $175,000 through this offering and
issued 175,000 shares of common stock and warrants to purchase 131,250 shares of
common stock. The warrants issued in connection with the units were
valued at $118,058 using the Black-Scholes option pricing
model. Issuance costs consisted of a 7% cash fee and an additional
warrant to purchase 8,750 shares of common stock with an exercise price of $1.00
per share valued at $7,895 using the Black-Scholes option pricing
model. In May 2008, the Company updated the agreement prospectively
with the placement agent to increase both the cash and warrant placement fees
from 7% to 9% as well as to provide to the placement agent a 2.5% cash expense
allowance. During June 2008, the Company issued 400,000 shares and raised
$354,000, net of placement fees, through this offering. The 300,000 warrants
issued in connection with the units were valued at $271,438 using the
Black-Scholes option pricing model.
On
February 12, 2008, the Company entered into a consulting agreement with New
Castle Consulting. Pursuant to
this agreement, New Castle provided investor relations services to the Company
for a period of 6 months in exchange for payment of $4,500, which was made in
conjunction with the execution of the agreement, a monthly fee of $4,500 the
payment of which began in March 2008, the issuance of 100,000 shares of
restricted common stock valued at $100,000 and an indemnity. As the
shares were unforfeitable upon issuance and there was no guarantee of future
benefit to be provided, the value of the shares was expensed upon issuance to
investor relations and other related consulting expense in the quarter ended
March 31, 2008.
On
February 14, 2008, the Company entered into a consulting agreement with Kulman
IR. Pursuant to this agreement, Kulman was to provide investor relations
services to the Company for a period of 12 months in exchange for a monthly fee
of $3,500, the issuance of 100,000 shares of restricted common stock valued at
$100,000, the payment of pre-approved expenses incurred by Kulman in discharging
its obligations under the agreement and cross-indemnities. In regards to the
stock that was issued, 50,000 shares vested immediately, 25,000 shares vested on
August 7, 2008 and the remaining 25,000 shares were to vest on October 7, 2008.
During August 2008, the Company terminated the agreement and cancelled the
25,000 unvested shares. As there was no guarantee of future benefit to be
provided, the value of the vested shares was expensed upon issuance to investor
relations and other related consulting expense in the quarter ended March 31,
2008.
In
February 2009, the Company issued 94,628 shares of restricted common stock
valued at $1.10 per share to a vendor as settlement for past services
rendered.
In April
2009, one investor exercised warrants to purchase 36,294 shares of common stock
exercisable at $1.01 per share. The warrant was exercised pursuant to
the cashless provision contained in the warrant and as such, the Company issued
16,732 shares to the investor.
In May
2009, one investor exercised warrants to purchase 172,928 shares of common stock
exercisable at $1.00 per share. The warrant was exercised pursuant to
the cashless provision contained in the warrant and as such, the Company issued
88,150 shares to the investor.
During
May and June 2009, the Company issued 1,732,248 shares of common stock for
warrants that were exercised in connection with a tender offer as more fully
described in “stock warrants” below.
In June
2009, five investors exercised warrants to purchase 116,232 shares of common
stock exercisable at $1.00 to $1.01 per share. The warrants were
exercised pursuant to the cashless provision contained in the warrants and as
such, the Company issued 82,378 shares to the investor.
On June
4, 2009, the Company closed the sale and issuance of 1,142,860 shares of common
stock to GR Match 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 the Company will use for general working capital. Pursuant to
the terms of the Securities Purchase Agreement documenting the transaction, GR
Match has demand and piggyback registration rights with respect to the
shares. Also, in the event the Company sells or issues shares of its
common stock or common stock equivalents at a price per share below $1.75 during
the ninety days following the closing of the transaction, except for certain
exempt issuances, GR Match will receive additional shares of common stock in
order to effectively re-price the shares at such lower price. The Company did
not record any liability on its books as of June 30, 2009 for this re-price
provision.
On June
10, 2009, the Company closed the sale and issuance of 632,500 shares of common
stock to Shimski L.P. for an aggregate purchase price of $1,106,875. Pursuant to
the terms of the Securities Purchase Agreement, Shimski L.P. has demand and
piggyback registration rights with respect to the shares. Also, in
the event the Company sells or issues shares of its common stock or common stock
equivalents at a price per share below $1.75 during the ninety days following
the closing of the transaction, except for certain exempt issuances, Shimski
L.P. will receive additional shares of common stock in order to effectively
re-price the shares at such lower price. The Company did not record any
liability on its books as of June 30, 2009 for this re-price
provision.
See
“stock options” below for additional shares issued during the six months ended
June 30, 2009 related to the exercise of stock options.
F-12
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT (Continued)
See Note
5 for additional shares issued during the six months ended June 30, 2009 related
to the convertible notes payable.
Stock
warrants
On
November 11, 2008, the Company entered into a consulting agreement with Newview
Consulting L.L.C. (“Newview”) Pursuant to this agreement, Newview will provide
investor relations services for a period of 6 months in exchange for a warrant
to purchase 2,250,000 shares of common stock at a price of $1.25 per share.
900,000 warrants vested immediately and 270,000 warrants were to vest on the 1st
of each month beginning December 1, 2008 and ending April 1,
2009. Either party may terminate the agreement with fifteen days
written notice. At January 1, 2009, the Company amended the vesting
schedule in the Newview warrant to vest the remaining 1,080,000 warrants on the
first of each month from January 1, 2009 to June 1, 2009 at the rate of 180,000
warrants per month. As such, 540,000 and 1,080,000 warrants vested
during the three and six month periods ended June 30, 2009 and the value of
$471,448 and $974,339, using the Black Scholes pricing model, was expensed to
investor relations and other consulting expense. At June 30, 2009,
all of the warrants had vested.
On
January 17, 2009, the Company entered into a two month consulting agreement with
Michael Barrett for consulting services relating to financial management and
reporting. As part of the agreement, Mr. Barrett was granted a
warrant to purchase 2,500 shares of common stock with a term of five years at an
exercise price of $1.25 per share, for each month of the term of the
agreement. The fair value of these warrants was $3,753, using a Black
Scholes pricing model, and was expensed during the current period to investor
relations and other consulting expense.
On
October 30, 2008, the Company executed a letter of intent with a subsidiary of
Guthy-Renker, Guthy Renker Match, LLC (“GRM”) to create, market and distribute
direct response advertisements to sell the Company’s products. GRM is
responsible for creating, financing, producing, testing and evaluating a radio
commercial to market the Company’s products in exchange for $50,000 and a fully
vested, non-forfeitable warrant to purchase 1,000,000 shares of common stock at
a price of $1.25 per share with an estimated fair value of $951,495 using the
Black-Scholes pricing model. The fair value of the warrant was
capitalized at the time of issuance and has been expensed over the five month
term of service. For the three and six months ended June 30, 2009, the Company
expensed $0 and $570,897 to investor relations and other consulting
expense. Subsequent to December 31, 2008, the Company entered into a
Media and Marketing Services Agreement with GRM, as described below, and amended
this warrant.
On March
24, 2009, the Company 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 is to
continue until August 31, 2010, 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, because the agreement had not
been terminated, the Company appointed a representative of GRM 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.
As
compensation for GRM’s services, the Company agreed to amend the warrant
described above so that the terms were consistent with the warrants described
below. None of the amended terms resulted in an accounting change to
the warrant. In conjunction with the execution of the Media and
Marketing Services Agreement and for creating, financing, producing, testing and
evaluating a television commercial to market the Company’s products, the Company
issued to GRM a second 5 year warrant for the purchase of 1,000,000 shares of
the Company’s common stock at a price of $1.25 per share valued at $712,303
using the Black-Scholes pricing model. The fair value of the warrant
was capitalized at the time of issuance and will be expensed over the five month
expected term of service. $427,382 and $569,843 was expensed during the three
and six months ended June 30, 2009 to investor relations and other consulting
expense. This warrant may be exercised only for
cash. Finally, the Company agreed to issue to GRM a 5 year warrant
for the purchase of 8,000,000 shares of the Company’s common stock at an
exercise price of $1.25 per share. This warrant may be exercised only
with cash. This warrant will be subject to vesting as
follows: for each $2 of media placement costs advanced by GRM on the
Company’s behalf, the right to purchase one share of the Company’s common stock
will vest. As of June 30, 2009, the right to purchase 277,050 of the
8,000,000 warrant shares has vested and was valued at $246,698 using the
Black-Scholes pricing model. The fair value of these 277,050 vested
warrants has been expensed to interest expense, $211,083 and $246,698 for the
three and six months ended June 30, 2009, as the warrants represent compensation
to GRM for the advancement of media costs on the Company’s behalf. The remaining
7,722,950 warrants are not guaranteed to vest as they are contingent on GRM
advancing media placement costs, as such, these unvested warrants have not been
included or accounted for as outstanding dilutive securities at June 30,
2009.
If GRM
terminates the agreement due to a breach by the Company in the Company’s
performance or as a result of the Company’s discontinuance, dissolution,
liquidation, winding up or insolvency, or if the Company terminates the
agreement for any reason, any unexpired and unvested rights of GRM to purchase
shares of the Company’s common stock pursuant to the agreement will immediately
vest. If the Company breaches its payment obligations under the agreement and
fails 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.
F-13
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT (Continued)
On April
1, 2009, the Company entered into an agreement with a consultant for management
consulting and business advisory services on an as needed basis. The
consultant was granted a warrant to purchase 850,000 shares of the Company’s
common stock for a period of five years at an exercise price of
$1.25. These warrants vest as follows: 300,000 immediately and 50,000
per month on the 1st day of
each month commencing May 1, 2009 and ending March 1, 2010. The fair value of
the 400,000 vested warrants of $367,646 was expensed to investor relations and
other consulting expense for the three and six months ended June 30,
2009.
On April
5, 2009, the Company entered into an agreement with a consultant for marketing
related services. The agreement had a term of three
months. The agreement provided compensation of $13,000 for month one,
$14,000 for month two and $15,000 for month three. In addition, the
consultant was granted a warrant to purchase 15,000 shares of the Company’s
common stock for a period of five years at an exercise price of
$1.25. This warrant was to vest 5,000 shares per month over the term
of the agreement. On May 15, 2009, the original agreement was terminated, along
with the right to purchase 5,000 shares of common stock that would have vested
in June 2009, and the Company entered into a second agreement with the
consultant. The second agreement had a term of three months and
provided compensation of $17,500 for month one, of which 50% will be deferred
for 30 days, and $8,750 per month thereafter. In addition, the consultant was
granted a warrant to purchase 15,000 shares of the Company’s common stock for a
period of five years at an exercise price of $1.25. The warrant was
to vest 5,000 shares per month over the term of the second agreement. The second
agreement also provided for a bonus of up to 50,000 additional warrant shares at
an exercise price of $1.83 for achieving certain goals. On June 15, 2009, the
second agreement was terminated, along with the right to purchase 10,000 shares
of common stock that would have vested in July and August 2009, and the Company
entered into a third agreement with the consultant. The third
agreement has a term of two months. The third agreement provided compensation of
$12,500 per month. In addition, the consultant was granted a warrant to purchase
10,000 shares of the Company’s common stock for a period of five years at an
exercise price of $1.25. This warrant vests 5,000 shares per month
over the term of the agreement. Additionally, the consultant was granted a
warrant to purchase 5,000 shares of the Company’s common stock for a period of
five years at an exercise price of $1.83 for deferring 50% of the compensation
due for May 2009 until July 30, 2009 and a warrant to purchase 5,000 shares of
the Company’s common stock for a period of five years at an exercise price of
$1.83 as part of the bonus per the second agreement. The third agreement also
provided for a bonus of up to 45,000 additional warrant shares at an exercise
price of $1.83 for achieving certain goals. The fair value of the 25,000
warrants that were granted and vested of $46,414 was expensed to investor
relations and other consulting expense for the three and six months ended June
30, 2009.
On April
24, 2009, the Company entered into an agreement with Michael Barrett for
consulting services relating to financial management and
reporting. As part of the agreement, Mr. Barrett was granted a
warrant to purchase 2,500 shares of common stock at an exercise price of $1.80
per share. The fair value of the warrant, which was computed as $3,453, was
expensed to investor relations and other consulting expense for the three and
six months ended June 30, 2009.
In May
2009, the Company began an offering to the holders of its warrants issued with
“cashless exercise” provisions and/or “down-round” provisions (collectively the
“Released Provisions”). Pursuant to the offering, the warrant holders
were given the opportunity to increase by 10% the number of shares of common
stock covered by their warrants in exchange for extinguishing the Released
Provisions from their warrants. In order for the warrant holders to
take advantage of the offer, they were required to exercise a portion of their
warrant(s) and purchase for cash no less than 30% of the shares of common stock
covered by their warrant(s), after giving effect to the increase. On
June 29, 2009, the Company filed a Schedule TO with the SEC covering this
offering. Per the Schedule TO, the offering expired on July 28,
2009. Subsequent to June 30, 2009, the Schedule TO was amended and
the offering was extended until August 17, 2009. As of June 30, 2009, the
Company has received $1,899,420 in proceeds, net of offering costs of $68,891,
and issued 1,732,248 shares of common stock to warrant holders that have
participated in this offer. Additionally, the Company has issued
warrants to purchase 243,005 shares of the Company’s common stock for the 10%
increase in warrants offered to warrant holders. The additional warrants were
valued at $500,630, using the Black Scholes pricing model, and were expensed to
interest expense during the period.
On May
15, 2009, the Company entered into an agreement with a second consultant for
marketing related services. The agreement had a term of three months
and provided compensation of $17,500 for month one, of which 50% will be
deferred for 30 days, and $8,750 per month thereafter. In addition, the
consultant was granted a warrant to purchase 15,000 shares of the Company’s
common stock for a period of five years at an exercise price of
$1.83. The warrant was to vest 5,000 shares per month over the term
of the second agreement. The agreement also provided for a bonus of up to 50,000
additional warrants at an exercise price of $1.83 for achieving certain goals.
On June 15, 2009, the agreement was terminated, along with the right to purchase
10,000 shares of common stock that would have vested in June and July 2009, and
the Company entered into a second agreement with the consultant. The
second agreement has a term of two months and provided compensation of $12,500
per month. In addition, the consultant was granted a warrant to purchase 10,000
shares of the Company’s common stock for a period of five years at an exercise
price of $1.83. This warrant vests 5,000 shares per month over the
term of the agreement. Additionally, the consultant was granted a warrant to
purchase 5,000 shares of the Company’s common stock for a period of five years
at an exercise price of $1.83 for deferring 50% of the compensation due for May
2009 until July 30, 2009 and a warrant to purchase 5,000 shares of the Company’s
common stock for a period of five years at an exercise price of $1.83 as part of
the bonus per the second agreement. The second agreement also provided for a
bonus of up to 45,000 additional warrants at an exercise price of $1.83 for
achieving certain goals. The fair value of the 15,000 warrants that were granted
and vested of $29,864 was expensed to investor relations and other consulting
expense for the three and six months ended June 30, 2009.
See Note
5 for additional warrants issued during the six months ended June 30, 2009
related to the convertible notes payable.
F-14
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT (Continued)
The
following represents a summary of the warrants outstanding at June 30, 2009 and
2008 and changes during the six months then ended:
Six
Months Ended
|
||||||||||||||||||||||||
June
30, 2009
|
June
30, 2008
|
|||||||||||||||||||||||
Number
of
Warrants
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Number
Of
Warrants
|
Weighted
Average
Exercise
Prices
|
Aggregate
Intrinsic
Value
|
|||||||||||||||||||
Outstanding,
beginning of period
|
11,029,890 | $ | 1.14 | 5,741,306 | $ | 1.05 | ||||||||||||||||||
Issued
|
2,580,855 | $ | 1.24 | 647,573 | $ | 1.25 | ||||||||||||||||||
Expired/forfeited
|
- | - | - | - | ||||||||||||||||||||
Exercised
|
(2,057,702 | ) | $ | 1.12 | - | - | ||||||||||||||||||
Outstanding,
end of period
|
11,553,043 | $ | 1.17 | $ | 24,002,870 | 6,388,879 | $ | 1.07 | $ | 4,327,646 | ||||||||||||||
Exercisable,
end of period
|
11,103,043 | $ | 1.17 | $ | 23,102,870 | 6,388,879 | $ | 1.07 | $ | 4,327,646 |
The
following table summarizes information about warrants outstanding at June 30,
2009:
Exercise
Price
|
Number
of
Warrant
Shares
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|||
$ 1.00
|
2,907,575
|
2.35
|
|||
$ 1.01
|
706,341
|
6.42
|
|||
$ 1.20
|
324,875
|
3.01
|
|||
$ 1.25
|
7,586,752
|
3.72
|
|||
$
1.80
|
2,500
|
4.82
|
|||
$
1.83
|
25,000
|
4.94
|
|||
11,553,043
|
3.52
|
The
weighted average grant date fair value of warrants granted during the six months
ended June 30, 2009 was $1.16 per warrant. The outstanding warrants at June 30,
2009 are held by consultants and other service providers, stockholders, and
former noteholders.
The
Company’s common stock purchase warrants do not trade in an active securities
market, therefore, we estimate the fair value of these warrants using the
Black-Scholes option pricing model using the following assumptions for the six
months ended June 30, 2009:
Annual
dividend yield
|
0.0%
|
|||
Average
expected life (years)
|
2.22-5.10
|
|||
Risk-free
interest rate
|
2.42-3.29%
|
|||
Expected
volatility
|
88-103%
|
Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using weekly pricing observations for the prior year. The Company
believes this method produces an estimate that is representative of the
Company’s expectations of future volatility over the expected term of these
warrants. The Company currently has no reason to believe future volatility over
the expected remaining life of these warrants is likely to differ materially
from historical volatility. The expected life is based on the remaining term of
the warrants. The risk-free interest rate is based on 10-year U.S. Treasury
securities.
F-15
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT (Continued)
Stock
options
In
January 2005, the Company adopted the CyberDefender Corporation 2005 Stock
Option Plan (sometimes called the CyberDefender Corporation 2005 Equity
Incentive Plan and referred to herein as the “2005 Plan”), which consists of
equity programs that provide for the granting of Incentive Stock Options or
Nonstatutory Stock Options, the issuance of stock appreciation rights, stock
purchase rights and awards of stock. Under the terms of the 2005 Plan, the
exercise price of options granted may be equal to, greater than or less than the
fair market value on the date of grant, the options may have a maximum term of
ten years and generally vest over a period of service or
attainment of specified performance objectives. The maximum aggregate amount of
options that may be granted from the 2005 Plan is 931,734
shares.
On
October 30, 2006, the Company adopted the Amended and Restated 2006 Equity
Incentive Plan (“2006 Plan”) that provides for the granting of Incentive Stock
Options or Nonstatutory Stock Options, the issuance of stock appreciation
rights, stock purchase rights and awards of stock. Under the terms of the 2006
Plan, the exercise price of options granted may be equal to, greater than
or less than the fair market value on the date of grant, the options may have a
maximum term of ten years and generally vest over a period of service or
attainment of specified performance objectives. On June 17, 2009, the board of
directors amended the 2006 Plan to increase the maximum aggregate amount of
stock based awards that may be granted from the 2006 Plan to 2,875,000
shares.
On March
31, 2008, the Company granted to Michael Barrett, the Company’s former Chief
Financial Officer, an option to purchase 20,000 shares of common stock at a
price of $1.00 per share.
On April
16, 2008, the Company granted to Michael Barrett, the Company’s former Chief
Financial Officer, an option to purchase 20,000 shares of common stock at a
price of $1.00 per share.
On April
16, 2008, the Company granted to three consultants options to purchase 130,700
shares of common stock at prices ranging from of $1.00 to $1.25 per
share.
In June
2008, the Company granted to employees options to purchase 160,000 shares of
common stock at prices ranging from $1.01 to $1.10 per share.
In
January 2009, the Company granted to Kevin Harris, the Company’s Chief Financial
Officer, an option to purchase 200,000 shares of common stock at an exercise
price of $1.00 per share, vesting as follows: 25,000 of the option shares vested
on the date of grant; 25,000 of the option shares vested three months after the
grant date; and the balance of 150,000 option shares vests in equal monthly
increments over the term of his employment agreement. In addition,
per the terms of the employment agreement, the Company granted options to
purchase 25,000 shares of common stock at an exercise price of $1.00 per share,
vesting equally over 24 months, as bonus compensation at March 31, 2009 and at
June 30, 2009, respectively.
On
January 1, 2009, the Company entered into a three month consulting agreement
with Unionway International, LLC, an entity controlled by Mr. Bing Liu, for
consulting services. As part of the agreement, Mr. Liu was granted a
10-year option to purchase 18,000 shares of common stock at an exercise price of
$1.00 per share vesting in equal monthly increments over the term of the
agreement as compensation for 2008 achievements. In addition, Mr. Liu
has been granted a 10-year option to purchase 5,000 shares of common stock at an
exercise price of $1.00 per share vesting 2,500 shares on January 1, 2009, 1,250
shares on February 1, 2009 and 1,250 shares on March 1, 2009.
On
January 17, 2009, the Company entered into a two month consulting agreement with
Michael Barrett for consulting services relating to financial management and
reporting. As part of the agreement, Mr. Barrett was granted an
option to purchase 2,500 shares of common stock at an exercise price of $1.25
per share, per month for the term of the agreement.
On April
1, 2009, the Company entered into a three month consulting agreement with
Unionway International, LLC, an entity controlled by Mr. Bing Liu, for
consulting services. As part of the agreement, Mr. Liu was granted a
10-year option to purchase 15,000 shares of common stock at an exercise price of
$1.25 per share vesting over the term of the agreement.
From
January through June 2009, the Company granted to employees options to purchase
a total of 335,000 shares of common stock under the 2006 Plan and the 2005 Plan
at a prices ranging from of $1.00 to $3.30 per share.
F-16
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT (Continued)
A summary
of stock option activity for the 2005 Plan and 2006 Plan is as
follows:
Six
Months ended
|
||||||||||||||||||||||||
June
30, 2009
|
June
30, 2008
|
|||||||||||||||||||||||
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
|||||||||||||||||||
Outstanding,
beginning of period
|
1,444,084 | $ | 0.83 | 1,316,384 | $ | 0.75 | ||||||||||||||||||
Granted
|
628,000 | $ | 1.45 | $ | 1,129,120 | 330,700 | $ | 1.05 | $ | 230,350 | ||||||||||||||
Exercised
|
(75,106 | ) | $ | 1.11 | $ | 143,575 | - | $ | - | $ | ||||||||||||||
Cancelled
|
(104,041 | ) | $ | 1.08 | $ | 191,934 | (290,458 | ) | $ | 1.06 | $ | 201,844 | ||||||||||||
Outstanding,
end of period
|
1,892,937 | $ | 1.01 | $ | 4,243,794 | 1,356,626 | $ | 0.76 | $ | 1,348,412 | ||||||||||||||
Exercisable,
end of period
|
1,210,411 | $ | 0.76 | $ | 3,009,875 | 1,041,952 | $ | 0.67 | $ | 1,130,157 |
The
weighted-average grant date fair value of options granted during the six months
ended June 30, 2009 and 2008 was $1.33 and $0.75 per option,
respectively.
As of
June 30, 2009 and 2008, 682,526 and 314,674 of the options granted are not
vested with an estimated remaining value of $1,233,919 and $232,527,
respectively. As of June 30, 2009 and 2008, 453,980 and 253,414 of the unvested
options are expected to vest with an estimated remaining value of $828,111 and
$176,414, respectively. At June 30, 2009, 1,210,411 of these options were
exercisable with a weighted average remaining contractual term of 7.0 years. The
weighted average remaining contractual life of all options outstanding at June
30, 2009 is 7.9 years.
The
Company recorded compensation expense associated with the issuance and
vesting of stock options of $56,429 and $141,637 for the three and six
months ended June 30, 2009, respectively. The Company recorded compensation
expense associated with the issuance and vesting of stock options of
$88,348 and $117,853 for the three and six months ended June 30, 2008,
respectively.
During
the three and six months ended June 30, 2009, the Company received proceeds of
$83,086 for 75,106 stock options exercised. The total intrinsic value of the
stock options exercised was $143,575. There were no stock options exercised
during the six months ended June 30, 2008.
NOTE
5 - CONVERTIBLE NOTES PAYABLE
On
September 12, 2006, the Company entered into a Securities Purchase Agreement
with 13 accredited investors pursuant to which it sold 10% secured convertible
debentures (the “2006 Debentures”) in the aggregate principal amount of
$3,243,378 and common stock purchase warrants to purchase an aggregate of
3,243,378 shares of the Company’s common stock at $1.00 per share (the “Base
Conversion Price”). The debenture holders have the right to convert the 2006
Debentures into 3,243,378 shares of common stock. The 2006 Debentures
mature on September 12, 2009 and bear interest at the rate of 10% per year,
payable quarterly. If, during the time that the 2006 Debentures are outstanding,
the Company sells or grants any option to purchase (other than options issued
pursuant to a plan approved by our board of directors), or sells or grants any
right to reprice its securities, or otherwise disposes of or issues any common
stock or common stock equivalents entitling any person to acquire shares of the
Company’s common stock at a price per share that is lower than the conversion
price of the debentures or that is higher than the Base Conversion Price but
lower than the daily volume weighted average price of the common stock, then the
conversion price of the 2006 Debentures will be reduced. During August 2009, the
Company received a waiver whereby the holders of the 2006 Debentures permanently
waived, as of and after April 1, 2009, any and all conversion or exercise price
adjustments that would otherwise occur, or would have occurred on or oafter
April 1, 2009, as a result of this provision.
Under the
terms of the Registration Rights Agreement executed in conjunction with the
offering, the Company is obligated to register for resale at least 130% of the
shares of its common stock issuable upon the conversion of the 2006 Debentures
and the exercise of the common stock purchase warrants. However, the agreement
also prohibits the Company from registering shares of common stock on a
registration statement that total more than one-half of the issued and
outstanding shares of common stock, reduced by 10,000 shares.
F-17
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
If a
registration statement was not filed within 30 days of the sale of the 2006
Debentures, or was not effective 120 days from the date of the sale of the 2006
Debentures, which was January 10, 2007, or if the Company did not respond to an
SEC request for information during the registration period within 10 days of
notice, the Company was required to pay to each holder of its 2006 Debentures an
amount in cash, as partial liquidated damages and not as a penalty, equal to
1.5% of the aggregate subscription amount paid by each holder. The Company, (1)
was not liable for liquidated damages with respect to any warrants or warrant
shares, (2) was not liable for liquidated damages in excess of 1.5% of the
aggregate subscription amount of the holders in any 30-day period, and (3) the
maximum aggregate liquidated damages payable to a holder was 18% of the
aggregate subscription amount paid by such holder up to a maximum aggregate
liquidated damages of 18% of the total amount of the 2006 Debentures, or
$583,808. If the Company failed to pay any partial liquidated damages in full
within seven days after the date payable, the Company would pay interest at a
rate of 18% per annum to the holder, accruing daily from the date such partial
liquidated damages were due until such amounts, plus all such interest, were
paid in full. The partial liquidated damages applied on a daily pro-rata basis
for any portion of a month.
Pursuant
to Amendment No. 1 to the Registration Rights Agreement, the holders of the
Company’s 2006 Debentures agreed to extend the filing date of the registration
statement to October 31, 2006, and pursuant to Amendment No. 2 to the
Registration Rights Agreement, the holders of the Company’s 2006 Debentures
agreed to extend the filing date of the registration statement to November 3,
2006. The Company did not meet the 10 day response period for responding to an
SEC request for additional information nor did the Company meet the target
registration statement effectiveness date of January 10, 2007. The holders did
not agree to waive the liquidated damages that accrued due to the Company’s
failure to meet the 10 day period for responding to an SEC request for
additional information nor did the holders agree to waive the liquidated damages
that accrued due to the Company’s failure to have the registration statement
declared effective by January 10, 2007.
In
accordance with FASB Staff Position Emerging Issues Task Force (“FSP EITF”)
00-19-02, “Accounting for Registration Payment Arrangements,” the Company
believed, at the time the 2006 Debentures were issued, that it was probable that
it would be in violation of certain filing provisions within the Registration
Rights Agreement and recorded $111,897 as a discount to the 2006 Debentures. On
March 23, 2007 the Company entered into a Consent and Waiver agreement as more
fully described below that determined the actual liquidated damages to be
$169,917 calculated through March 23, 2007 and covering the period through April
30, 2007.
The
Company was also required to make an interest payment to the 2006 Debenture
holders on April 1, 2007. The Consent and Waiver allowed the Company to make the
April 1 interest payment and pay the liquidated damages in one of two ways to be
chosen by each holder. For payment of the 2006 Debenture holder’s pro rata
portion of the April 1 interest payment, the 2006 Debenture holder could choose
to increase the principal amount of his 2006 Debenture by his pro-rata share of
the accrued interest amount or accept shares of the Company’s common stock
valued at $0.85 per share for this purpose. For payment of the 2006 Debenture
holders pro rata portion of the liquidated damages, each 2006 Debenture holder
had the same choice, that is, either to increase his 2006 Debenture by the pro
rata liquidated damages amount or accept shares of the Company’s common stock
valued at $0.85 per share for this purpose. If all the 2006 Debenture holders
were to choose to accept shares of the Company’s common stock in payment of the
April 1 interest payment and the liquidated damages, the Company would be
required to issue up to a total of 566,336 shares of the Company’s common stock.
The Consent and Waiver allowed the Company to issue these shares without
triggering the anti-dilution rights included in the original offering documents.
The Company has issued 195,594 shares as partial payment for these liquidated
damages valued at $166,259. At December 31, 2008 and June 30, 2009, $3,658 of
these damages remained in accrued expenses - registration rights agreement. The
Company issued 190,090 shares in November and December 2007 as partial payment
for the April 1 interest payment of $161,580. The Company issued 15,669 shares
in January and February 2008 as partial payment for the April 1 interest
payments of $13,319.
The
Consent and Waiver allowed the Company to issue to Oceana Partners, LLC, without
triggering the anti-dilution rights, 50,000 shares of common stock in
consideration for research coverage for a 12-month period.
The
Company did not meet the April 30, 2007 date for its registration statement to
be declared effective by the SEC. The registration statement became effective on
July 19, 2007. As a result, the Company incurred additional liquidated damages
for the period May 1 through July 19, 2007 of $132,726. On September 21, 2007
the Company received from the holders of the 2006 Debentures a second Consent
and Waiver. The holders of the 2006 Debentures agreed to accept shares of the
Company’s common stock at $0.85 per share instead of cash as payment
for the interest due on July 1, 2007 and October 1, 2007 and for damages
incurred under the Registration Rights Agreement. The Company issued 135,063
shares in February 2008 as partial payment for these liquidated damages valued
at $106,513. The Company issued 931 shares in April 2009 as partial payment for
these liquidated damages valued at $791. At December 31, 2008 and June 30, 2009,
$26,213 and $25,422 of these damages remained in accrued expenses - registration
rights agreement. The Company issued 94,952 shares in February 2008 as partial
payment for the July 1 and October 1, 2007 interest payments of
$110,147.
F-18
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
The
Company did not meet the August 18, 2007 date to file a second registration
statement. As a result, the Company incurred additional liquidated damages for
the period August 18 through December 19, 2007 of $194,603. The
Company received from the holders of the 2006 Debentures a third Consent and
Waiver, dated February 13, 2008 and amended on August 19, 2008. The third
Consent and Waiver waived the requirement included in the 2006 Debentures and
the Registration Rights Agreement that the Company file a second registration
statement, waived the liquidated damages that accrued from and after December
19, 2007 and waived the payment of any interest that would have accrued on the
liquidated damages. The holders of the 2006 Debentures agreed to accept either
additional debentures or shares of the Company’s common stock at $0.85 per
share instead of cash as payment for the interest due on January 1, 2008
and as payment of the liquidated damages accrued prior to December 19, 2007
under the Registration Rights Agreement. In August 2008, a holder of the 2006
Debentures converted $6,000 of accrued liquidated damages into 6,000 shares of
common stock as more fully described below. In September 2008, the Company
issued $64,422 in additional debentures as payment of liquidated damages, which
included $4,422 of penalty interest, and $26,868 in additional debentures as
payment for quarterly interest due on January 1, 2008, which included $1,868 of
penalty interest. The additional debentures had a term of 18 months and are
convertible at $0.85 per share. During October and December 2008, the
Company issued $349,494 in additional debentures as payment of liquidated
damages, quarterly interest, and penalty interest. These additional
debentures also have a term of 18 months and are convertible at $0.85 per share.
The Company issued 3,750 shares in December 2008 as partial payment for these
liquidated damages valued at $3,750. At December 31, 2008,
$4,732 remained in accrued expenses - registration rights agreement. The Company
issued 5,567 shares in April 2009 as partial payment for these liquidated
damages valued at $4,732. At June 30, 2009, $0 remained in accrued expenses -
registration rights agreement.
According
to the terms of the 2006 Debentures, the Company is to make interest payments
quarterly on January 1, April 1, July 1 and October 1 until September 2009, when
the principal amount and all accrued but unpaid interest will be
due. The Company failed to make the interest payments that were due
on April 1, and July 1, 2008, totaling $139,169. On September 22, 2008 the
Company received from the holders of the 2006 Debentures a fourth Consent and
Waiver of defaults of the 2006 Debentures. The holders of the 2006 Debentures
agreed to accept either additional debentures or shares of the Company’s common
stock at $0.85 per share instead of cash as payment for the interest
due on April 1, July 1, and October 1, 2008, totaling $205,207. In
August 2008, certain holders of the 2006 Debentures converted $8,694 of accrued
interest into 8,694 shares of common stock as more fully described below. During
October and December 2008, the Company issued $349,494 in additional debentures
as payment of liquidated damages, quarterly interest, and penalty
interest. The additional debentures have a term of 18 months and are
convertible at $0.85 per share. The Company issued 6,250 shares in December 2008
as partial payment for interest valued at $6,250. The Company failed to make the
interest payments that were due on January 1, April 1, and July 1 2009, totaling
$126,614. The Company issued 9,281 shares in April 2009 as partial payment for
interest valued at $7,886. In May 2009, the Company paid $56,575 for quarterly
interest, which included $3,810 of penalty interest. At June 30,
2009, $110,212 remained in accrued interest on the 2006 Debentures.
The
holders of certain shares and warrants for the purchase of common stock issued
in conjunction with the sale of the Company’s Secured Convertible Promissory
Notes during the period from November 2005 through March 2006, which were
converted on September 12, 2006, also have certain registration rights. These
holders agreed to defer their rights to require registration of their securities
on the registration statement the Company filed; however, they have maintained
the rights to piggyback on future registration statements filed by the
Company.
The
Company has accounted for the 2006 Debentures according to SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities,” EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock,” FSP EITF 00-19-2, EITF 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, EITF 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments” and EITF 07-5
“Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock”. The Company has accounted for the registration rights
arrangement under the guidance of FSP EITF 00-19-2 and the warrants and the
embedded conversion feature as derivative liabilities under the guidance of EITF
07-5, see Note 2. The value of the 2006 Debentures was allocated between the
2006 Debentures, the registration rights arrangement and the warrants, including
the beneficial conversion feature, which amounted to $63,689, $111,897 and
$3,067,792, respectively. The discount of $3,179,689 related to the registration
rights arrangement and the warrants, including the beneficial conversion
feature, is being amortized over the term of the 2006 Debentures. The Company
amortized $47,369 and $445,760 to interest expense for the three and six months
ended June 30, 2009, respectively, including the acceleration of amortization
due to conversions discussed below. The Company amortized $221,192 and $442,384
to interest expense for the three and six months ended June 30, 2008,
respectively, including the acceleration of amortization due to conversions
discussed below. The remaining unamortized warrant and beneficial conversion
feature value of $31,523 is recorded as a discount on the 2006 Debentures on the
accompanying balance sheet.
In
addition, as part of the transaction, the Company paid $217,000, issued
1,000,515 shares of common stock in November 2006 valued at $1,000,515 and
issued 217,000 unit purchase options with each unit consisting of 1 share of
common stock and a warrant to purchase 1 share of common stock for $1.00 per
share in November 2006. The unit purchase options were valued at $374,531 using
the Black-Scholes option pricing model. These costs, totaling $1,592,046, are
being amortized over the term of the 2006 Debentures. The Company recorded
amortization of $23,681 and $222,846 to interest expense, including the
acceleration of amortization due to conversions discussed below, related to the
2006 Debentures during the three and six months ended June 30, 2009. The Company
recorded amortization of $110,579 and $221,158 to interest expense, including
the acceleration of amortization due to conversions discussed below, related to
the 2006 Debentures during the three and six months ended June 30, 2008. The
unamortized amount of $15,759 is recorded as part of the deferred financing
costs in the accompanying balance sheet.
F-19
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
In
November and December 2007, certain holders of the 2006 Debentures converted
$460,000 of notes and $48,406 of accrued interest into 508,406 shares of common
stock at $1.00 per share. The unamortized discount of $253,481 on the converted
notes was recorded as interest expense at the time of the
conversion.
In August
2008, certain holders of the 2006 Debentures converted $300,000 of principal and
$15,468 of accrued interest, accrued liquidated damages and penalty interest
into 315,468 shares of common stock at $1.00 per share and 86,601 warrants to
purchase shares of the Company’s common stock at $1.25 per share. The
unamortized discount of $103,310 on the converted notes was recorded as interest
expense at the time of the conversion.
In
November and December 2008, certain holders of the 2006 Debentures converted
$481,408 of principal into 481,408 shares of common stock at $1.00 per
share. The unamortized discount of $121,673 on the converted notes
was recorded as interest expense at the time of the conversion.
In
January 2009, certain holders of the 2006 Debentures converted $50,000 of
principal into 50,000 shares of common stock at $1.00 per share. The
unamortized discount of $10,596 and the unamortized debt issuance costs of
$5,297 on the converted notes were recorded as interest expense at the time of
the conversion.
In
February 2009, certain holders of the 2006 Debentures converted $601,439 of
principal into 601,439 shares of common stock at $1.00 per share. The
unamortized discount of $111,523 and the unamortized debt issuance costs of
$55,753 on the converted notes were recorded as interest expense at the time of
the conversion. In addition, those same holders converted $207,473 of
principal amount and accrued interest of certain other debentures received in
2008 into 244,086 shares of common stock at $0.85 per share.
In March
2009, certain holders of the 2006 Debentures converted $854,163 of principal
into 854,163 shares of common stock at $1.00 per share. The unamortized discount
of $135,759 and the unamortized debt issuance costs of $67,869 on the converted
notes were recorded as interest expense at the time of the
conversion. In addition, certain holders of the 10% convertible
debentures converted $26,868 of principal into 31,609 shares of common stock at
$0.85 per share.
In April
2009, certain holders of the 2006 Debentures converted $99,697 of principal into
99,697 shares of common stock at $1.00 per share. The unamortized
discount of $13,205 and the unamortized debt issuance costs of $6,601 on the
converted notes were recorded as interest expense at the time of the
conversion.
In May
and June 2009, a certain holder of 10% convertible debentures, which had been
issued as payment of interest and penalties on the 2006 Debentures, converted
$68,855 of principal into 81,006 shares of common stock at $0.85 per
share.
On
November 21, 2008, the Company entered into a fifth Consent and Waiver agreement
whereby the holders of the 2006 Debentures agreed to allow the Company to sell
up to $1,200,000 in aggregate principal amount of the Company’s 10% Convertible
Promissory Notes (“2008 Convertible Notes”), due eleven months from the date of
issuance and convertible into shares of Common Stock at a conversion price of
$1.25 per share. In consideration of the waiver and the consent provided by the
holders, the Company agreed to accelerate the maturity date of the 18 month 10%
convertible debentures to September 12, 2009 and the Company agreed and
acknowledged that the 2006 warrant shares and the shares of common stock
underlying the 18 month 10% convertible debentures issued or issuable to each of
the holders in payment of interest and liquidated damages pursuant to prior
consent and waiver agreements shall carry “piggyback” registration
rights.
Per the
Consent and Waiver discussed above, in November and December 2008, the Company
entered into a Securities Purchase Agreement, that also included registration
rights, with certain accredited investors to which it sold 2008 Convertible
Notes in the aggregate principal amount of $845,000, which may be converted at
the price of $1.25 per share (subject to adjustment as discussed below) into an
aggregate of 676,000 shares of common stock. In conjunction with the
sale of the 2008 Convertible Notes, the Company issued common stock purchase
warrants to purchase an aggregate of 338,000 shares of common stock at $1.25 per
share. In January 2009, the Company completed the sale and
issuance of the Company’s 2008 Convertible Notes. Accordingly, the Company
received additional gross proceeds of $355,000, which may be converted at the
price of $1.25 per share (subject to adjustment as discussed below) into an
aggregate of 284,000 shares of common stock. In conjunction with the
sale of the 2008 Convertible Notes, the Company issued common stock purchase
warrants to purchase an aggregate of 142,000 shares of common stock at $1.25 per
share and paid its placement agent a total of $21,300 in commissions and issued
to its placement agent a five-year warrant to purchase an additional 21,300
shares of the Company’s common stock, at an exercise price of $1.25 per
share.
F-20
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
If,
during the time that the 2008 Convertible Notes are outstanding, the Company
sells or grants any option to purchase (other than options issued to its
employees, officers, directors or consultants), or sells or grants any right to
re-price its securities, or otherwise dispose of or issue any common stock or
common stock equivalents entitling any person to acquire shares of our common
stock at a price per share that is lower than the conversion price of these
notes, then the conversion price of the 2008 Convertible Notes will be reduced
according to the following weighted average formula: the conversion
price will be multiplied by a fraction the denominator of which will be the
number of shares of common stock outstanding on the date of the issuance plus
the number of additional shares of common stock offered for purchase and the
numerator of which will be the number of shares of common stock outstanding on
the date of such issuance plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at the conversion
price. A reduction in the conversion price resulting from the
foregoing would allow holders of its 2008 Convertible Notes to receive more than
960,000 shares of its common stock upon conversion of the outstanding principal
amount. In that case, an investment in our common stock would be
diluted to a greater extent than it would be if no adjustment to the conversion
price were required to be made. During August 2009, the Company received a
waiver from the holders of the 2008 Convertible Notes pursuant to which they
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 this provision.
Under the
terms of the Registration Rights Agreement executed in conjunction with the
offering, the Company is obligated to file a registration statement with the SEC
covering the resale of the shares issuable upon conversion of the 2008
Convertible Notes and the exercise of the common stock purchase
warrants The Company must file the registration statement no later
than 60 days following the final closing date of the sale and issuance of the
2008 Convertible Notes and warrants, and must use its best efforts to cause the
registration statement to become effective no later than 120 days thereafter. If
the Company is delinquent in the filing deadline or the effectiveness deadline
of the registration statement, it will be obligated to pay the holders of the
2008 Convertible Notes liquidated damages equal to 1% of the outstanding
principal amount of the 2008 Convertible Notes for every 30-day period of
delinquency, up to a maximum of 10%. The Company may pay any such liquidated
damages in cash or its common stock valued at the average volume weighted
average price (“VWAP”) for the five trading days preceding the applicable due
date, provided such average VWAP exceeds $1.00 per share. On May 1, 2009, the
Company received a Consent and Waiver from the holders of the 2008 Convertible
Notes waiving all liquidated damages under the Registration Rights
Agreement.
The
warrants are redeemable at a price of $0.01 per share in the event (i) the
average VWAP of the Company’s common stock for 10 consecutive trading days
equals or exceeds 2.5 times the then current exercise price, (ii) the average
daily trading volume of the common stock during such 10-trading day period is at
least 50,000 shares and (iii) there is an effective registration statement
covering the resale of the shares issuable upon exercise of the
warrants.
The total
value of the 2008 Convertible Notes was allocated between the 2008 Convertible
Notes and the warrants, including the beneficial conversion feature, which
amounted to $595,646 and $604,354, respectively. The discount of $604,354
related to the warrants, including the beneficial conversion feature, is being
amortized over the term of the 2008 Convertible Notes. The Company amortized
$164,824 and $329,648 to interest expense related to the 2008 Convertible Notes
for the three and six months ended June 30, 2009. The remaining unamortized
warrant and beneficial conversion feature value of $218,181 is recorded as a
discount on the 2008 Convertible Notes on the accompanying balance sheets. At
June 30, 2009, $65,799 of interest has been accrued on these notes.
In
addition, as part of the transaction, the Company paid $72,000 and issued common
stock purchase warrants to purchase an aggregate of 72,000 shares of common
stock at $1.25 per share. The warrants were valued at $65,695 using the
Black-Scholes option pricing model. These costs, totaling $137,695, are being
amortized over the term of the 2008 Convertible Notes. The Company
recorded amortization of $37,553 and $75,106 to interest expense during the
three and six months ended June 30, 2009. The unamortized amount of $49,986 is
recorded as part of the deferred financing costs in the accompanying balance
sheet.
During
May 2009, the Company entered into a sixth Consent and Waiver agreement whereby
the holders of the 2006 Debentures agreed to allow the Company to sell up to
$300,000 in aggregate principal amount of the Company’s 10% Convertible
Promissory Notes (“2009 Convertible Notes”), due five months from the date of
issuance and convertible into shares of Common Stock at a conversion price of
$1.75 per share. Per the Consent and Waiver discussed above, in May
2009, the Company entered into a Securities Purchase Agreement with certain
accredited investors to which it sold 2009 Convertible Notes in the aggregate
principal amount of $300,000, which may be converted at the price of $1.75 per
share into an aggregate of 171,429 shares of common stock. In
conjunction with the sale of the 2009 Convertible Notes, the Company paid its
placement agent a total of $12,000 in commissions. The Company recorded
amortization of $4,800 to interest expense during the three and six months ended
June 30, 2009. The unamortized amount of $7,200 is recorded as part of the
deferred financing costs in the accompanying balance sheet.
The total
value of the 2009 Convertible Notes was allocated between the 2009 Convertible
Notes and the beneficial conversion feature, which amounted to $19,715. The
discount of $19,715 related to the beneficial conversion feature is being
amortized over the term of the 2009 Convertible Notes. The Company amortized
$7,886 to interest expense related to the 2009 Convertible Notes for the three
and six months ended June 30, 2009. The remaining unamortized warrant and
beneficial conversion feature value of $11,829 is recorded as a discount on the
2009 Convertible Notes on the accompanying balance sheets. At June 30, 2009,
$4,722 of interest has been accrued on these notes.
F-21
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
Convertible
notes payable consist of the following:
June
30, 2009
|
December
31, 2008
|
|||||||
Debentures
outstanding
|
$ | 534,259 | $ | 2,442,754 | ||||
2008
Convertible Notes
|
1,200,000 | 845,000 | ||||||
2009
Convertible Notes
|
300,000 | - | ||||||
Unamortized
discount on debentures
|
(261,533 | ) | (866,225 | ) | ||||
Convertible
notes payable, net
|
$ | 1,772,726 | $ | 2,421,529 |
NOTE
6 - NOTES PAYABLE
7.41% Senior Secured
Original Issue Discount Notes
During
2007, the Company sold $864,000 in face amount of its 7.41% Senior Secured
Original Issue Discount Notes (“7.41% Notes”) and warrants to purchase 400,000
shares of the Company’s common stock for a purchase price of $800,000. The 7.41%
Notes are due one year from issuance with interest at 7.41% payable at maturity.
One warrant to purchase 5 shares of the Company’s common stock was issued for
every $10 of purchase price paid. The warrants may be exercised at a price of
$1.20 per share for a period of 5 years beginning nine months after issuance of
the warrant. Pursuant to the warrant agreements, if the Company issues common
stock or common stock equivalents at a price lower than the warrant exercise
price (the “Base Share Price”), then the warrant exercise price will be reduced
to equal the Base Share Price and the number of warrant shares issuable will be
increased so that the aggregate exercise price, after taking into account the
decrease, will be equal to the aggregate exercise price prior to the adjustment.
During August 2009, the Company received a waiver pursuant to which they 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 this provision. The Company has accounted
for the debentures according to SFAS 133, EITF 00-19, EITF 98-5 and EITF 00-27.
The Company had accounted for the warrants as equity derivative liability under
the guidance of EITF 07-5. See Note 2. The value of the 7.41% Notes was
allocated between the original issue discount (“OID”), the warrants and the
debentures which amounted to $64,000, $242,352 and $557,648, respectively. The
discount related to the OID and warrants of $306,352 will be amortized over the
one year term of the 7.41% Notes. The warrants issued in connection with the
7.41% Notes were valued using the Black-Scholes option pricing
model.
The
Company recorded $0 of interest expense related to the amortization of the
discount related to 7.41% Notes and warrants for the three and six months ended
June 30, 2009, respectively. The Company recorded $52,883 and $129,471 of
interest expense related to the amortization of the discount related to 7.41%
Notes and warrants for the three and six months ended June 30, 2008,
respectively.
As part
of the second Consent and Waiver described above in Note 5, the holders of the
Debentures agreed to allow the Company to sell the $864,000 face amount of 7.41%
Notes in exchange for warrants to purchase 150,000 shares of the Company’s
common stock at an exercise price of $1.00 per share. The warrants were valued
at $128,038 using the Black-Scholes option pricing model with the following
assumptions: term of 5 years, a risk-free interest rate of 4.52%, a dividend
yield of 0% and volatility of 124%. These costs were recorded as deferred
financing costs and will be amortized over the term of the 7.41% Notes. As part
of the issuance of the 7.41% Notes certain officers of the Company transferred
to Oceana Partners and Carlin Capital 400,000 shares of common stock valued at
$1.00 per share. The value of $400,000 was recorded as deferred financing cost
and was amortized over the term of the 7.41% Notes. The transfer of shares from
the officers was recorded in additional paid-in capital.
The
Company recorded amortization of deferred financing costs of $0 to interest
expense related to the 7.41% Notes during the three and six months ended June
30, 2009, respectively. The Company recorded amortization of deferred financing
costs of $22,002 and $154,011 to interest expense related to the 7.41% Notes
during the three and six months ended June 30, 2008, respectively.
Pursuant
to the Registration Rights Agreement the Company signed in connection with the
offering of the 7.41% Notes, the Company was required to register 125% of the
number of shares underlying the related warrants. The Company was required to
file a registration statement for this purpose within 180 days following the
date that the units were sold, and the Company would be in default of the
Registration Rights Agreement if it failed to file the registration statement
within 30 days following the expiration of the 180 day period. The Company
obtained a Consent and Waiver from the holders of the 7.41% Notes in relation to
the liquidated damages under the Registration Rights Agreement. As
more fully described below the Company issued 19,616 shares for payment of
$19,616 of liquidated damages. As of June 30, 2009 and December 31,
2008, the Company has recorded $19,143 in accrued expenses – registration rights
agreement.
F-22
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - NOTES PAYABLE (Continued)
During
2008, certain holders of the 7.41% Notes converted their notes in the face
amount of $675,000 plus accrued interest of $50,133 and penalties of $19,616
into 744,749 shares of the Company’s common stock and warrants to purchase
558,557 shares of the Company’s common stock at an exercise price of $1.25 per
share. As the Company’s negotiated conversion was at a price per
share identical to the units described in Note 5, no gain or loss was recorded
upon the conversion. The Company issued 67,027 warrants to purchase shares of
common stock at $1.00 per share for a term of five years, valued at $81,723 per
the Black Scholes pricing model, to the placement agent for this
conversion.
At
December 31, 2008 all of the 7.41% Notes were converted or paid in
full.
Note Payable to
Shareholder
In March
2008, Gary Guseinov pledged 750,000 shares of his common stock in CyberDefender
Corporation to Michael and Casey DeBaecke in exchange for a loan of $160,000
made to the Company. The pledge was non-recourse to Mr. Guseinov in the event
the collateral was foreclosed upon due to the Company’s failure to pay the loan.
So long as there was no event of default in connection with the loan, Mr.
Guseinov could continue to vote the shares at any annual or special meeting of
the shareholders. The loan was due to be repaid on the earlier of two months
from signing of the loan document or two days following the Company’s receipt of
over $500,000 in new equity capital following the date of the promissory note
evidencing the loan. Additionally, the Company issued warrants to purchase
40,000 shares of the Company’s stock. The warrants may be exercised at a price
of $1.25 per share for a period of 5 years. The discount related to the warrants
of $36,092 was amortized to interest expense during 2008. The warrants issued in
connection with the note were valued using the Black-Scholes option pricing
model. The loan plus accrued interest was paid in full on July 30,
2008.
NOTE
7 - COMMITMENTS AND CONTINGENCIES
On
January 30, 2009, the Company entered into a one year lease with its current
landlord for approximately 2,395 rentable square feet of additional office space
for temporary expansions as the Company negotiates a larger space in the same
building. On June 19, 2009, the Company entered into a non-binding
Letter of Intent (“LOI”) 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
August 2009 and that the Company will relocate to its new office space under the
terms of this amended lease as of December 1, 2009.
Litigation
In the
ordinary course of business, the Company may face various claims brought by
third parties and the Company may, from time to time, make claims or take legal
actions to assert its rights. Any of these claims could subject the Company to
costly litigation and, while the Company generally believes that it has adequate
insurance to cover many different types of liabilities, the Company’s insurance
carriers may deny coverage or the Company’s policy limits may be inadequate to
fully satisfy any damage awards or settlements. If this were to happen, the
payment of any such awards could have a material adverse effect on the Company’s
operations, cash flows and financial position. Additionally, any such claims,
whether or not successful, could damage the Company’s reputation and business.
Management believes the outcome of currently pending claims and lawsuits will
not likely have a material effect on the Company’s operations or financial
position.
Guarantees and
Indemnities
During
the normal course of business, the Company has made certain indemnities and
guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company’s officers, under which the Company may be required to indemnify such
persons for liabilities arising out of their employment relationship. The
duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for
any limitation of the maximum potential future payments the Company could be
obligated to make. The Company hedges some of the risk associated with these
potential obligations by carrying general liability insurance. Historically, the
Company has not been obligated to make significant payments for these
obligations and no liabilities have been recorded for these indemnities and
guarantees in the accompanying statement of financial position.
F-23
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND
CONTINGENCIES (Continued)
On
October 30, 2006, the Company entered into Indemnification Agreements with Mr.
Guseinov, Mr. Ivankovich, the former Chief Financial Officer, Mr. Liu and Mr.
Barash, on November 6, 2007 the Company entered into an Indemnification
Agreement with Mr. John LaValle, a former director, on February 1, 2008 the
Company entered into an Indemnification Agreement with Mr. Michael Barrett, and
on March 24, 2009 the Company entered into an Indemnification Agreement with Mr.
Kevin Harris, the Chief Financial Officer, all of whom are sometimes
collectively referred to in this discussion as the “indemnified parties” or
individually referred to as an “indemnified party.” The agreements require the
Company to provide indemnification for the indemnified parties for expenses
(including attorneys’ fees, expert fees,
other professional fees and court costs, and fees and expenses incurred in
connection with any appeals), judgments (including punitive and exemplary
damages), penalties, fines and amounts paid in settlement (if such settlement is
approved in advance by the Company, which approval shall not be unreasonably
withheld) actually and reasonably incurred by the indemnified parties in
connection with any threatened, pending or completed action or proceeding
(including actions brought on the Company’s behalf, such as shareholder
derivative actions), whether civil, criminal, administrative or investigative,
to which he is or was a party, a witness or other participant (or is threatened
to be made a party, a witness or other participant) by reason of the fact that
he is or was a director, officer, employee or agent of the Company or any of its
subsidiaries. The indemnification covers any action or inaction on the part of
the indemnified party while he was an officer or director or by reason of the
fact that he is or was serving at the Company’s request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise. In the event of any change, after the date of the
Indemnification Agreements, in any applicable law, statute or rule which expands
the right of a California corporation to indemnify a member of its board of
directors or an officer, such changes shall be within the purview of the
indemnified parties’ rights and the Company’s obligations under the
Indemnification Agreements.
The
Indemnification Agreements are effective as of the date they were signed and may
apply to acts or omissions of the indemnified parties which occurred prior to
such date if the indemnified party was an officer, director, employee or other
agent of the Company, or was serving at the Company’s request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, at the time such act or omission occurred. All
obligations under the Indemnification Agreements will continue as long as an
indemnified party is subject to any actual or possible matter which is the
subject of the Indemnification Agreement, notwithstanding an indemnified party’s
termination of service as an officer or director.
NOTE
8 - RELATED PARTY TRANSACTIONS
Unionway
International, LLC, an entity controlled by Bing Liu, a former officer and
director, provides software development services to the Company. During the
three and six months ended June 30, 2009 and 2008, the Company paid Unionway
International, LLC $36,000 and $49,500, respectively.
NOTE
9 - SUBSEQUENT EVENTS
On July
21, 2009, the Company closed the sale and issuance of 200,000 shares of common
stock to twenty-eight accredited investors for an aggregate purchase price of
$500,000, the proceeds of which the Company will use for general working
capital. There were no issuance costs related to this
sale.
On July
21, 2009, the Company’s board of directors appointed Mr. Bennet Van De Bunt as a
director. Bennet Van De Bunt is the Co-CEO
of Guthy-Renker. Mr. Van De Bunt was selected as a director pursuant
to the Company’s obligation under the Media and Marketing Services Agreement
(see Note 4). Mr. Van De Bunt has not been and is not expected to be
named to any committee of our board of directors. The Company also
entered into an Indemnification Agreement with Bennet Van De Bunt similar to
those described in Note 7 above. All of the obligations under the
Indemnification Agreement will continue as to any matter which is the subject of
the Indemnification Agreement, notwithstanding the termination of Mr. Van De
Bunt’s service as a director.
The
Company extended the warrant offering described in Note 4 above until August 17,
2009. From July 1 through August 13, 2009, the Company has received $73,994 in
proceeds, net of offering costs of $2,684, and issued 70,977 shares of common
stock to warrant holders that have participated in the warrant offering
described in Note 4 above. Additionally, the Company has issued
warrants to purchase 16,213 shares of the Company’s common stock for the 10%
increase in warrants offered to warrant holders. The additional warrants were
valued at $31,411, using the Black Scholes pricing model, and will be recorded
to interest expense.
During
July and August 2009, the Company granted to employees options to purchase a
total of 29,500 shares of common stock under the 2006 Plan and the 2005 Plan at
a prices ranging from of $2.50 to $3.10 per share.
On July
24, 2009, the Company entered into a licensing agreement with Wiley Publishing,
Inc., owner of the For
Dummies® trademark, for use of the For
Dummies® trademark in connection with the manufacture, development,
operation, sale, distribution and promotion of the Company’s
products. The term of the agreement is five years with an option for
the Company to renew for an additional five years provided that the Company has
paid to Wiley a minimum royalty of $2,000,000 during the initial term of the
agreement. The Company has paid a $100,000 non-refundable royalty
advance.
During
August 2009, the Company received waivers from the holders of its convertible
securities permanently waiving, as of and after April 1, 2009, any and all
conversion or exercise price adjustment provisions that would cause such
securities to be accounted for as derivative liabilities, according to EITF 07-5
(see Note 2).
F-24
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Cyberdefender
Corporation
We have
audited the accompanying balance sheets of Cyberdefender Corporation (the
“Company”) as of December 31, 2008 and 2007 and the related statements of
operations, stockholders’ deficit and cash flows for the years then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Cyberdefender Corporation as of
December 31, 2008 and 2007 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has recurring losses from operations, negative
working capital, an accumulated deficit and has not generated significant
revenues to cover costs to date. These factors raise substantial
doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
KMJ
| Corbin & Company LLP
|
Costa
Mesa, California
March 31,
2009
F-25
CYBERDEFENDER
CORPORATION
BALANCE
SHEETS
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 779,071 | $ | 236,995 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $0
|
204,635 | 19,053 | ||||||
Deferred
financing costs, current
|
324,200 | 596,917 | ||||||
Prepaid
expenses
|
689,478 | 21,885 | ||||||
Deferred
charges, current
|
811,542 | 40,560 | ||||||
Total
Current Assets
|
2,808,926 | 915,410 | ||||||
PROPERTY
AND EQUIPMENT, net
|
94,883 | 129,643 | ||||||
DEFERRED
FINANCING COSTS, net of current portion
|
- | 331,146 | ||||||
DEFERRED
CHARGES, net of current portion
|
239,983 | - | ||||||
OTHER
ASSETS
|
26,196 | 26,097 | ||||||
Total
Assets
|
$ | 3,169,988 | $ | 1,402,296 | ||||
LIABILITIES AND STOCKHOLDERS’
DEFICIT
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 3,798,645 | $ | 647,976 | ||||
Accrued
expenses
|
331,229 | 619,805 | ||||||
Accrued
expenses - registration rights agreement
|
53,745 | 166,297 | ||||||
Current
portion of deferred revenue
|
4,025,026 | 629,442 | ||||||
Notes
payable, net of discount
|
- | 705,298 | ||||||
Current
portion of convertible notes payable, net of discount
|
2,421,529 | - | ||||||
Current
portion of capital lease obligations
|
27,291 | 24,271 | ||||||
Total
Current Liabilities
|
10,657,465 | 2,793,089 | ||||||
CONVERTIBLE
NOTES PAYABLE, net of discount, less current portion
|
- | 1,235,035 | ||||||
DEFERRED
REVENUE, less current portion
|
527,927 | - | ||||||
CAPITAL
LEASE OBLIGATIONS, less current portion
|
16,776 | 41,347 | ||||||
Total
Liabilities
|
11,202,168 | 4,069,471 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
DEFICIT:
|
||||||||
Common
stock, no par value; 50,000,000 shares authorized; 17,350,798 and
13,994,597 shares issued and outstanding at December 31, 2008 and December
31, 2007, respectively
|
6,381,921 | 4,788,349 | ||||||
Additional
paid-in capital
|
11,398,623 | 7,105,428 | ||||||
Accumulated
deficit
|
(25,812,724 | ) | (14,560,952 | ) | ||||
Total
Stockholders’ Deficit
|
(8,032,180 | ) | (2,667,175 | ) | ||||
Total
Liabilities and Stockholders’ Deficit
|
$ | 3,169,988 | $ | 1,402,296 |
See
accompanying notes to financial statements
F-26
CYBERDEFENDER
CORPORATION
STATEMENTS
OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008
|
2007
|
|||||||
REVENUES:
|
||||||||
Net
sales
|
$ | 4,887,759 | $ | 2,220,154 | ||||
COST
OF SALES
|
767,115 | 179,789 | ||||||
GROSS
PROFIT
|
4,120,644 | 2,040,365 | ||||||
OPERATING
EXPENSES:
|
||||||||
Advertising
|
7,106,455 | 614,857 | ||||||
Product
development
|
530,010 | 537,558 | ||||||
Selling,
general and administrative
|
3,727,253 | 3,198,073 | ||||||
Invester
relations and other related consulting
|
1,265,616 | 477,071 | ||||||
Depreciation
and amortization
|
39,408 | 101,025 | ||||||
Total
Operating Expenses
|
12,668,742 | 4,928,584 | ||||||
LOSS
FROM OPERATIONS
|
(8,548,098 | ) | (2,888,219 | ) | ||||
OTHER
EXPENSE:
|
||||||||
Other
expense
|
- | (4,413 | ) | |||||
Loss
on registration rights agreement
|
(216,540 | ) | (84,864 | ) | ||||
Interest
expense
|
(2,486,334 | ) | (2,887,827 | ) | ||||
Total
Other Expenses
|
(2,702,874 | ) | (2,977,104 | ) | ||||
LOSS
BEFORE INCOME TAX EXPENSE
|
(11,250,972 | ) | (5,865,323 | ) | ||||
INCOME
TAX EXPENSE
|
800 | 800 | ||||||
NET
LOSS
|
$ | (11,251,772 | ) | $ | (5,866,123 | ) | ||
Basic
and fully diluted net loss per share
|
$ | (0.72 | ) | $ | (0.47 | ) | ||
Weighted
Average Shares Outstanding:
|
||||||||
Basic
and fully diluted
|
15,562,790 | 12,439,759 |
See
accompanying notes to financial statements
F-27
CYBERDEFENDER
CORPORATION
STATEMENTS
OF STOCKHOLDERS’ DEFICIT
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Additional
|
||||||||||||||||||||
Common Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance
at December 31, 2006
|
12,173,914 | $ | 3,561,821 | $ | 5,027,228 | $ | (8,694,829 | ) | $ | (105,780 | ) | |||||||||
Value
of warrants issued with debt
|
— | — | 370,390 | — | 370,390 | |||||||||||||||
Conversion
of bridge notes
|
460,000 | 460,000 | — | — | 460,000 | |||||||||||||||
Issuance
of shares for penalties and interest
|
418,683 | 363,153 | — | — | 363,153 | |||||||||||||||
Sale
of shares with warrants attached, net of issuance costs of
$45,815
|
654,500 | 218,252 | 390,433 | — | 608,685 | |||||||||||||||
Issuance
of shares and warrants for
services
|
287,500 | 185,123 | 418,946 | — | 604,069 | |||||||||||||||
Shares
contributed to third party directly by officers and directors for
financing costs
|
— | — | 400,000 | — | 400,000 | |||||||||||||||
Compensation
expense on vested options
|
— | — | 498,431 | — | 498,431 | |||||||||||||||
Net
loss
|
— | — | — | (5,866,123 | ) | (5,866,123 | ) | |||||||||||||
Balance
at December 31, 2007
|
13,994,597 | 4,788,349 | 7,105,428 | (14,560,952 | ) | (2,667,175 | ) | |||||||||||||
Sale
of shares with warrants attached, net of cash issuance costs of
$112,757
|
1,155,500 | 139,504 | 903,239 | — | 1,042,743 | |||||||||||||||
Issuance
of shares and warrants for
services
|
300,000 | 393,673 | 1,873,110 | — | 2,266,783 | |||||||||||||||
Issuance
of shares for penalties and interest
|
271,091 | 253,081 | — | — | 253,081 | |||||||||||||||
Value
of warrants issued in association with debt
|
— | — | 83,590 | — | 83,590 | |||||||||||||||
Conversion
of OID notes and accrued interest
|
744,749 | 125,096 | 619,653 | — | 744,749 | |||||||||||||||
Conversion
of convertible notes and accrued interest
|
796,876 | 681,683 | 115,193 | — | 796,876 | |||||||||||||||
Value
of warrants and Beneficial conversion feature of convertible
notes payable
|
— | — | 445,467 | — | 445,467 | |||||||||||||||
Cashless
warrant exercise
|
37,985 | — | — | — | — | |||||||||||||||
Exercise
of stock options
|
50,000 | 535 | — | — | 535 | |||||||||||||||
Compensation
expense on vested options
|
— | — | 252,943 | — | 252,943 | |||||||||||||||
Net
loss
|
— | — | — | (11,251,772 | ) | (11,251,772 | ) | |||||||||||||
Balance
at December 31, 2008
|
17,350,798 | $ | 6,381,921 | $ | 11,398,623 | $ | (25,812,724 | ) | $ | (8,032,180 | ) |
See
accompanying notes to financial statements
F-28
CYBERDEFENDER
CORPORATION
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008
|
2007
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (11,251,772 | ) | $ | (5,866,123 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Loss
on registration rights agreement
|
216,540 | 84,864 | ||||||
Amortization
of debt discount
|
1,322,379 | 1,459,575 | ||||||
Depreciation
and amortization
|
39,408 | 101,025 | ||||||
Compensation
expense from vested stock options
|
252,943 | 498,431 | ||||||
Amortization
of deferred financing costs
|
702,061 | 1,032,089 | ||||||
Shares
issued for penalties and interest
|
253,081 | 363,153 | ||||||
Shares
and warrants issued for services
|
2,266,783 | 604,069 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(185,582 | ) | (14,846 | ) | ||||
Prepaid
and other assets
|
(667,593 | ) | 39,034 | |||||
Deferred
charges
|
(1,010,965 | ) | 41,253 | |||||
Other
assets
|
(99 | ) | - | |||||
Accounts
payable and accrued expenses
|
3,059,002 | 269,999 | ||||||
Deferred
revenue
|
3,923,511 | (356,941 | ) | |||||
Cash
Flows Used In Operating Activities
|
(1,080,303 | ) | (1,744,418 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property and equipment
|
(2,286 | ) | (5,424 | ) | ||||
Cash
Flows Used In Investing Activities
|
(2,286 | ) | (5,424 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from notes payable and convertible notes payable, net of
commissions
|
954,300 | 800,000 | ||||||
Principal
payments on notes payable
|
(349,000 | ) | - | |||||
Principal
payments on capital lease obligations
|
(23,913 | ) | (17,344 | ) | ||||
Proceeds
from exercise of stock options
|
535 | - | ||||||
Proceeds
from sale of stock, net of cash issuance costs
|
1,042,743 | 654,500 | ||||||
Cash
Flows Provided by Financing Activities
|
1,624,665 | 1,437,156 | ||||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
542,076 | (312,686 | ) | |||||
CASH
AND CASH EQUIVALENTS, beginning of year
|
236,995 | 549,681 | ||||||
CASH
AND CASH EQUIVALENTS, end of year
|
$ | 779,071 | $ | 236,995 |
See
accompanying notes to financial statements
F-29
CYBERDEFENDER
CORPORATION
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008
|
2007
|
|||||||
Supplemental
disclosures of cash flow information:
|
||||||||
Income
taxes paid
|
$ | 39 | $ | 18,211 | ||||
Cash
paid for interest
|
$ | 36,203 | $ | 17,769 | ||||
Supplemental
schedule of non-cash financing activities:
|
||||||||
Property
and equipment acquired through capital lease obligation
|
$ | 2,362 | $ | 22,716 | ||||
Discount
on notes payable
|
$ | 83,590 | $ | 370,390 | ||||
Warrants
issued in connection with sale of stock
|
$ | 903,239 | $ | 436,248 | ||||
Conversion
of notes payable and accrued interest to common stock and
warrants
|
$ | 1,541,625 | $ | 460,000 | ||||
Warrants
issued in connection with debt conversion
|
$ | 445,467 | $ | — | ||||
Convertible
notes payable issued as payment for accrued interest and
penalties
|
$ | 440,784 | $ | — | ||||
Deferred
financing costs to be paid by issuance of stock
|
$ | — | $ | 400,000 |
See
accompanying notes to financial statements
F-30
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and
Business
The
Company, based in Los Angeles, California, is a provider of secure content
management software. The Company develops and licenses security software and
related services. The Company continues to bring to market advanced solutions to
combat and prevent online information theft, unwanted advertisements, spam,
Internet viruses, spyware and related computer threats.
Going Concern and
Management’s Plans
Historically,
the Company’s revenues were derived from subscriptions to CyberDefender
Anti-Spyware 2006, which included the initial download and one year of updates.
The license to use the software was renewed annually with incentives for early
renewals. The Company acquired new users with an online direct purchase offer.
The offer, to scan
a computer for spyware and then pay for removal of spyware, was broadcast in
emails, banners and search ads.
In
November 2006, the Company launched its new Internet security suite called
CyberDefender FREE 2.0 that is free to the subscriber. Revenues are earned from
advertising networks which pay the Company to display advertisements inside the
software. CyberDefender Early Detection Center is a version of the same
software, without the advertising, which is paid for by the subscriber. The
annual subscription rate during 2008 for the version without ads ranged from
$12.99 to $49.99, depending on the marketing or distribution channels used by
the Company.
On
September 27, 2007, the Company announced the launch of CyberDefenderULTIMATE™
and CyberDefenderCOMPLETE™. These are enhanced versions of its
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 a one-time fix to a customer’s
computer and a year-round unlimited anti-malware support for a subscriber’s
computer. These new security suites also include 2 gigabytes of
online backup. These products are sold for $99.95 to $299.99,
depending on the marketing or distribution channels used by the
Company.
On
November 20, 2008, the Company announced the launch of 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 annual subscription rate ranges from $19.99 to $29.98,
depending on the marketing or distribution channels used by the
Company.
The
Company’s financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred net
losses of $11,251,772 and $5,866,123 during the years ended December 31, 2008
and 2007, respectively, and has negative working capital of $7,848,539 and an
accumulated deficit of $25,812,724 at December 31, 2008, which raises
substantial doubt about its ability to continue as a going concern. Until sales
of the products provide the Company with the revenue it needs to attain
profitability, the Company intends to continue to raise money for operating
capital through sales of its securities or by borrowing money. From
inception through December 31, 2008, the Company has raised $6,080,000 from
debt financing and $1,810,000 from equity financing to develop software and to
build out a management team capable of delivering its products to market. The
Company’s ability to continue as a going concern is dependent upon its ability
to develop additional sources of capital. Management cannot assure that any
future financing arrangements will be available in amounts or on terms
acceptable to the Company. If additional future financing is not available or is
not available on acceptable terms, the Company may be unable to continue its
operations. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
The
Company currently has no firm agreements with any third parties for any future
transactions and future financings.
Reclassification
To
conform to the current year's presentation, as a result of management's
continuing analysis of its operating activities, the Company reclassified
$179,789 related to amounts previously classified as operating expense to costs
of sales with no effect on previously reported net loss. In
addition, the Company reclassified $477,071 related to investor relations
and other related consulting from interest
expense.
F-31
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by management are, among
others, realization of accounts receivables, recoverability of prepaid expense,
deferred charges and long-lived assets, value of shares and options/warrants
granted and valuation of deferred tax assets. Actual results could differ from
those estimates and assumptions.
Cash and Cash
Equivalents
Cash and
cash equivalents include cash on hand and investments with original maturities
of three months or less.
Property and
Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance, and repairs
are charged to expense as incurred. When equipment is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in the results of operations for the
respective period. Depreciation is provided over the estimated useful lives of
the related assets ranging from three to seven years, using the straight-line
method.
Equipment under Capital
Lease
The
Company leases certain of its furniture and other equipment under agreements
accounted for as capital leases. The assets and liabilities under capital lease
are recorded at the lesser of the present value of aggregate future minimum
lease payments, including estimated bargain purchase options, or the fair value
of the assets under lease. Assets under capital lease are depreciated using the
straight-line method over their estimated useful lives.
Fair Value of Financial
Instruments
Unless
otherwise specified, the Company believes the carrying value of financial
instruments approximates their fair value.
Revenue
Recognition
The
Company recognizes revenue from the sale of software licenses under the guidance
of Statement of Position (“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”) No. 101 “Revenue Recognition in Financial
Statements” as amended by SAB 104.
Specifically,
the Company recognizes revenues from its products when all of the following
conditions for revenue recognition are met:
i.
|
persuasive
evidence of an arrangement exists,
|
|
ii.
|
the
product or service has been delivered,
|
|
iii.
|
the
fee is fixed or determinable, and
|
|
iv.
|
collection
of the resulting receivable is reasonably
assured.
|
The
Company currently sells four products, CyberDefender Early Detection Center
(“EDC”), an antivirus and anti spyware software, CyberDefender Registry Cleaner,
CyberDefenderULTIMATE™ and CyberDefenderCOMPLETE™, over the Internet. The
Company also offers a backup CD of the EDC software for an additional fee.
CyberDefenderCOMPLETE™ offers 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 the Company.
Upon receipt of authorization from the credit card issuer, the Company provides
technical support if the customer purchased CyberDefenderULTIMATE™ or
CyberDefenderCOMPLETE™ and licenses the customer to download EDC over the
Internet. As part of the sales price, the Company provides renewable product
support and content updates, which are separate components of product licenses
and sales. Term licenses allow customers to use the Company’s products and
receive product support coverage and content updates for a specified period,
generally twelve months. The Company invoices 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, CyberDefender Registry Cleaner and for the portion of the
sale of CyberDefenderCOMPLETE™ that relates to the one-time technical support as
the Company believes that all of the elements necessary for revenue recognition
have occurred.
The
Company also uses third parties to sell its software and therefore evaluates the
criteria of Financial Accounting Standards Board ("FASB") Emerging Issues Task
Force ("EITF") 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. The
Company is the primary obligor, is subject to inventory risk, has latitude in
establishing prices and selecting suppliers, establishes product specifications,
and has the risk of loss. Accordingly, the Company's revenue is recorded on a
gross basis.
The
Company also offers 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, the Company
recognizes 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 Company
obligations remain at the end of a period and collection of the resulting
receivable is probable. The Company’s obligations do not include guarantees of a
minimum number of impressions.
F-32
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred
Charges
The
Company uses a third party to provide technical support services associated with
the CyberDefenderCOMPLETE™ and CyberDefenderULTIMATE™ products. The
costs associated with this service are deferred and amortized against the
recognition of the related sales revenue.
In
addition, the Company uses a third party to process a portion of its product
renewal sales. The Company pays a direct acquisition fee to the processor 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 processor refunds
any direct acquisition fee 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 after a customer is automatically charged and
subsequently, within 30 days, decides not to continue using the license or the
credit card processed is no longer valid. The Company’s third party
processor of sales is usually notified within 30 days by customers that they no
longer wish to license the Company’s product. 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. The returns are charged against revenues upon receipt. As of
December 31, 2008 and 2007, the Company had $0 accrued for customer returns and
chargebacks, based on historical returns.
Concentrations of
Risk
Revenues
are concentrated in the software industry which is highly competitive and
rapidly changing.
Significant technological changes in the industry or customer requirements, or
the emergence of competitive products with new technologies or capabilities
could adversely affect operating results.
As of
December 31, 2008, all of our cash and cash equivalents were maintained at a
major financial institution in the United States. At times, deposits held with
the financial institution may exceed the amount of insurance provided on such
deposits. Generally, these deposits may be redeemed upon demand and, therefore,
are believed to bear low risk. Effective October 3, 2008, the Emergency Economic
Stabilization Act of 2008 raised the Federal Deposit Insurance Corporation
deposit coverage limits to $250,000 per owner from $100,000 per owner. This
program is currently available through December 31, 2009. As of
December 31, 2008, the Company had a balance of approximately $799,000 in excess
of the FDIC limit.
Advertising
expenses are expensed as incurred and consist primarily of various forms of
media purchased from Internet-based marketers and search engines. For the years
ended December 31, 2008 and 2007, advertising expense amounted to $7,106,455 and
$614,857, respectively. Advertising purchased from four vendors
accounted for 92% and 45% of the Company’s total advertising expense for the
years ended December 31, 2008 and 2007, respectively.
Income
Taxes
The
Company has adopted the liability method of accounting for income taxes pursuant
to Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for
Income Taxes.” Under SFAS No. 109, deferred income taxes are recorded to reflect
tax consequences on future years for the differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Deferred
income tax expense represents the change during the period in the deferred tax
assets and deferred tax liabilities. The components of the deferred tax assets
and liabilities are individually classified as current and non-current based on
their characteristics. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” (“FIN 48”). FIN 48 prescribes recognition thresholds that must be
met before a tax position is recognized in the financial statements and provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. Under FIN 48, an entity may only
recognize or continue to recognize tax positions that meet a “more likely than
not” threshold. The Company did not make any adjustment to opening retained
earnings as a result of the implementation.
F-33
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
(Continued)
Based on
its evaluation, the Company has concluded that there are no significant
uncertain tax positions requiring recognition in its financial statements. The
Company’s evaluation was performed for the tax years ended December 31,
2004 through 2008 for U.S. Federal Income Tax and for the tax years ending
December 31, 2003 through 2008 for the State of California Income
Tax.
The
Company does not have any unrecognized tax benefits as of December 31, 2008
that, if recognized, would affect the Company’s effective income tax
rate.
The
Company’s policy is to recognize interest and penalties related to income tax
issues as components of income tax expense. The Company did not recognize or
have any accrual for interest and penalties relating to income taxes as of
December 31, 2008.
Software Development
Costs
The
Company accounts 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. There have been 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 expense. For
the years ended December 31, 2008 and 2007, product development costs were
$530,010 and $537,558, respectively.
Recently Issued Accounting
Pronouncements
The
Company has adopted all accounting pronouncements effective before December 31,
2008 which are applicable to the Company.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This statement clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. FASB Staff Position
No. FAS 157-2 (“FSP 157-2”), “Effective Date of FASB Statement
No. 157,” was
issued in February 2008. FSP 157-2 delays the effective date of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except
for items that are recognized or disclosed at fair value at least once a year,
to fiscal years beginning after November 15, 2008, and for interim periods
within those fiscal years. Effective January 1, 2008, the Company adopted
SFAS 157 for financial assets and liabilities recognized at fair value on a
recurring basis. The partial adoption of SFAS 157 for financial assets and
liabilities had no impact on the Company’s financial position, results of
operations or cash flows. Management does not expect the adoption of the FSP to
have a material impact on the Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”
(“SFAS 141R”). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. This statement is effective
for the Company beginning January 1, 2009. The Company does not
expect the adoption of this statement to have a material impact on the
Company's consolidated financial statements unless the Company enters
into business acquisitions in the future.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements. SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” Management does not currently expect the
adoption of SFAS No. 162 to have a material impact on the Company’s financial
statements.
In June
2008, the Emerging Issues Task Force of the FASB published EITF Issue 07-5
“Determining Whether an Instrument is Indexed to an Entity’s Own Stock” (“EITF
07-5”) to address concerns regarding the meaning of “indexed to an entity’s own
stock” contained in FASB Statement 133 “Accounting for Derivative Instruments
and Hedging Activities”. This related to the determination of whether
a free-standing equity-linked instrument should be classified as equity or
debt. If an instrument is classified as debt, it is valued at fair
value, and this value is re-measured on an ongoing basis, with changes recorded
in earnings in each reporting period. EITF 07-5 is effective for
years beginning after December 15, 2008 and earlier adoption is not
permitted. Although EITF 07-5 is effective for fiscal years beginning
after December 15, 2008, any outstanding instrument at the date of adoption will
require a retrospective application of the accounting through a cumulative
effect adjustment to retained earnings upon adoption. The Company is
currently evaluating the impact of EITF 07-5 on its financial position and
results of operations.
F-34
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss Per
Share
In
accordance with SFAS No. 128, “Earnings Per Share”, the basic loss per
common share is computed by dividing net loss available to common stockholders
by the weighted average number of common shares outstanding. Diluted loss
per common share is computed similar to basic loss per common share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. As of December 31, 2008 and
2007, there were 14,807,513 and 10,138,067 shares of potentially dilutive
securities outstanding, respectively. As the Company reported a net
loss, none of the potentially dilutive securities were included in the
calculation of diluted earnings per share since their effect would be
anti-dilutive for that reporting period.
Stock Based
Compensation
The
Company applies SFAS No. 123 (Revised 2004), “Share Based Payment”
(“SFAS No. 123R”), which 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. For non-employee stock based compensation, the
Company recognizes an expense in accordance with SFAS No. 123 and values
the equity securities based on the fair value of the security on the date of
grant. For stock-based awards the value is based on the market value of the
stock on the date of grant or the value of services, whichever is more readily
available. Stock option awards are valued using the Black-Scholes option-pricing
model.
The
Company accounts for equity instruments issued to consultants and vendors in
exchange for goods and services in accordance with the provisions of EITF Issue
No. 96-18, “Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services”, and
EITF Issue No. 00-18, “Accounting Recognition for Certain Transactions Involving
Equity Instruments Granted to Other than Employees”. The measurement date for
the fair value of the equity instruments issued is determined at the earlier of
(i) the date at which a commitment for performance by the consultant or vendor
is reached or (ii) the date at which the consultant or vendor’s performance is
complete. In the case of equity instruments issued to consultants, the fair
value of the equity instrument is recognized over the term of the consulting
agreement.
In
accordance with EITF Issue No. 00-18, an asset acquired in exchange for the
issuance of fully vested, non-forfeitable equity instruments should not be
presented or classified as an offset to equity on the grantor’s balance sheet
once the equity instrument is granted for accounting purposes. Accordingly, the
Company records the fair value of the fully vested, non-forfeitable common stock
issued for future consulting services as prepaid expense in its balance
sheet.
NOTE
2 – RESTRICTED CASH
Under a
credit card processing agreement with a financial institution the Company was
required to maintain a security reserve deposit as collateral. The
amount of the deposit was at the discretion of the financial institution and as
of December 31, 2008 and 2007 was $15,000 and $8,592,
respectively. This amount is included in prepaid expenses on the
accompanying balance sheets.
NOTE
3 – PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
Furniture
and fixtures
|
$ | 121,370 | $ | 119,007 | ||||
Office
equipment
|
88,294 | 88,294 | ||||||
Software
|
10,766 | 8,481 | ||||||
220,430 | 215,782 | |||||||
Less
accumulated depreciation
|
(125,547 | ) | (86,139 | ) | ||||
Net
property and equipment
|
$ | 94,883 | $ | 129,643 |
NOTE
4 – INTANGIBLE
In
January 2005, the Company entered into an asset purchase agreement with Unionway
Int’l, LLC whereby the Company purchased certain assets of Unionway Int’l, LLC
that principally included the software application Cyber-Defender™ and
associated rights for $200,000 through the issuance of a note payable. The
software technology purchased from Unionway Int’l, LLC is the core of the
Company’s existing product. The asset is being amortized over the expected life
of three years on a straight line basis. The amortization for the year ended
December 31, 2008 and 2007 is $0 and $66,667, respectively and the accumulated
amortization is $200,000 as of December 31, 2008 and 2007.
F-35
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
5 - INCOME TAXES
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No.109” ("FIN 48"), which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice associated
with certain aspects of the recognition and measurement related to accounting
for income taxes. As of January 1, 2007, the Company became subject
to the provision of FIN 48. The cumulative effect, if any, of
applying FIN 48 was to be reported as an adjustment to the opening balance of
retained earnings in the year of adoption. The Company did not record
a cumulative effect adjustment upon the adoption of FIN 48. As of
December 31, 2008, the Company has concluded that its income tax filing
positions will be sustained on audit and does not anticipate any adjustments
that will result in a material change to its financial
position. Therefore, to date, no reserves for uncertain income tax
positions have been recorded pursuant to FIN 48.
The
Company is subject to taxation in the United States and the State of
California. The Company is subject to examination for tax years 2005
forward by the United States and the tax years 2004 forward by
California. The Company may be, due to unused net operating losses,
subject to examination for earlier years.
The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense. As of December 31, 2008 and 2007, the Company did
not recognize interest and/or penalties related to income tax
expense.
Deferred
income taxes reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. A valuation allowance is established when uncertainty
exists as to whether all or a portion of the net deferred tax assets will be
realized.
Components
of the net deferred tax asset as of December 31, 2008 and 2007 are approximately
as follows (in thousands):
December 31,
|
||||||||
2008
|
2007
|
|||||||
Deferred
tax assets
|
||||||||
Net
operating loss carryforwards
|
5,183,635 | 3,671,742 | ||||||
Stock
compensation expense
|
295,102 | 241,328 | ||||||
Accrued
liabilities
|
59,925 | 106,716 | ||||||
Contingent
liabilities
|
20,208 | 62,528 | ||||||
Accounts
payable
|
18,800 | 18,800 | ||||||
AMT
credit carryforwards
|
17,226 | 17,226 | ||||||
Charitable
contribution carryforwards
|
9,400 | 9,400 | ||||||
Total
gross deferred tax assets
|
5,604,296 | 4,127,740 | ||||||
Deferred
tax liabilities
|
||||||||
Depreciation/amortization
|
(13,387 | ) | (17,252 | ) | ||||
Deferred
Royalty
|
(9,224 | ) | - | |||||
Total
gross deferred tax liabilites
|
(22,611 | ) | (17,252 | ) | ||||
Net
deferred tax asset (liability)
|
5,581,685 | 4,110,488 | ||||||
Less
valuation allowance
|
(5,581,685 | ) | (4,110,488 | ) | ||||
Net
deferred tax assets
|
- | - |
The
Company’s effective income tax rate differs from the statutory federal income
tax rate as follows for the years ended December 31, 2008 and 2007:
December 31,
|
||||||||
2008
|
2007
|
|||||||
Federal
tax benefit rate
|
(34.0 | )% | (34.0 | )% | ||||
State
tax benefit, net of federal benefit
|
(1.8 | )% | (2.5 | )% | ||||
Debt
Discount Amortization
|
3.9 | % | 8.5 | % | ||||
Investor
Relations Consulting
|
5.6 | % | 0.0 | % | ||||
Warrants
Issued for Services
|
7.3 | % | 0.0 | % | ||||
Other
|
6.1 | % | 0.1 | % | ||||
Valuation
Allowance
|
12.9 | % | 27.9 | % | ||||
Effective
income tax rate
|
0.00 | % | 0.00 | % |
As
required by SFAS No. 109, the change in the valuation allowance for the years
ended December 31, 2008 and 2007 was $1,471,197 and $1,641,158, respectively,
for income taxes.
At
December 31, 2008, the Company had federal and state net operating loss
carryforwards of $13,786,263 and $13,660,459 available, respectively, to reduce
future taxable income and which will expire at various dates beginning in
2015.
Pursuant
to Internal Revenue Code Sections 382 and 383, the use of the Company’s net
operating loss and credit carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.
The
Company has not completed a study to assess whether an ownership change has
occurred or whether there have been multiple ownership changes since the
Company's formation due to the complexity and cost associated with such a study,
and the fact that there may be additional such ownership changes in the future.
If the Company has experienced an ownership change at any time since its
formation, utilization of the NOL carryforwards would be subject to an annual
limitation under Section 382 of the Code, which is determined by first
multiplying the value of the Company's stock at the time of the ownership change
by the applicable long-term, tax-exempt rate, and then could be subject to
additional adjustments, as required. Any limitation may result in expiration of
a portion of the NOL carryforwards before utilization. Further, until a study is
completed and any limitation known, no amounts are being considered as an
uncertain tax position or disclosed as an unrecognized tax benefit under FIN 48.
Due to the existence of the valuation allowance, future changes in the Company's
unrecognized tax benefits will not impact its effective tax rate. Any
carryforwards that will expire prior to utilization as a result of such
limitations will be removed from deferred tax assets with a corresponding
reduction of the valuation allowance.
F-36
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
6 – STOCKHOLDERS’ DEFICIT
Common
Stock
On August
15, 2007, the Company issued to Oceana Partners 50,000 shares of the Company’s
common stock in consideration for research coverage valued at $50,000 for a
twelve month period commencing August 1, 2007 thru July 31, 2008. The entire
$50,000 was recognized as selling, general and administrative costs in the
accompanying statement of operations for the year ended December 31, 2007. On
October 22, 2007, the Company entered into an agreement with Oceana Partners
pursuant to which the Company agreed to issue to Oceana Partners warrants to
purchase 400,000 shares of our common stock in exchange for research coverage
valued at $477,071 for services provided in 2007. The agreement was amended on
November 30, 2007. Pursuant to the amendment, the Company agreed to issue 37,500
shares of common stock to designees of Oceana Partners and to reduce the number
of shares of common stock covered by the warrants issued to Oceana Partners from
400,000 shares to 362,500 shares. The entire $477,071 was recognized
in investor relations and other related consulting in the accompanying
statement of operations for the year ended December 31, 2007.
On August
17, 2007, the Company issued to Richardson & Patel, its legal counsel,
100,000 shares of the Company’s common stock as payment for general corporate
legal services rendered that amounted to $23,578 that was recognized as selling,
general and administrative expense in the accompanying statement of operations
for the year ended December 31, 2007.
On
October 24, 2007, the Company issued to Richardson & Patel, its legal
counsel, 100,000 shares of the Company’s common stock as payment for general
corporate legal services rendered that amounted to $53,420 that was recognized
as selling, general and administrative expense in the accompanying statement of
operations for the year ended December 31, 2007.
On
October 18, 2007, the Company began an offering of units. Each unit
consisted of 25,000 shares of common stock and a warrant to purchase 18,750
shares of common stock at an exercise price of $1.25 per share. The
warrants have a term of five years. Pursuant to the warrant
agreements, from and after the warrant issue date, in the event the Company
sells common stock for less than the then exercise price or issues securities
convertible into or exercisable for common stock at a conversion price or
exercise price less than the then exercise price (a “Dilutive Issuance”), then
the exercise price shall be multiplied by a fraction, the numerator of which is
the number of shares of common stock sold and issued at the closing of such
Dilutive Issuance plus the number of shares which the aggregate offering price
of the total number of shares of common stock sold and issued at the closing of
such Dilutive Issuance would purchase at the then exercise price, and the
denominator of which is the number of shares of common stock issued and
outstanding on the date of such Dilutive Issuance plus the number of additional
shares of common stock sold and issued at the closing of such Dilutive
Issuance. The purchase price was $25,000 per unit. During
the fourth quarter of 2007, the Company issued 654,500 shares and raised
$654,500 through this offering. The 490,875 warrants issued in
connection with the units were valued at $436,248 using the Black-Scholes option
pricing model with the following assumptions: term of 5 years, a risk-free
interest rate of 4.52%, a dividend yield of 0% and volatility of
142%. Issuance costs consisted of a 7% cash fee and 32,200 warrants
at $1.00 per share valued at $29,054 based on the following assumptions: term of
5 years, a risk-free interest rate of 4.52%, a dividend yield of 0% and
volatility of 142%. Issuance
costs of $45,815 as of December 31, 2007 were recorded in accrued expense on the
accompanying balance sheet.
During
February and March, 2008, the Company issued 175,000 shares and raised $175,000
through this offering. The 131,250 warrants issued in connection with
the units were valued at $118,058 using the Black-Scholes option pricing model
with the following assumptions: term of 5 years, a risk-free interest rate of
4.52%, a dividend yield of 0% and volatility of 146-148%. Issuance
costs consisted of a 7% cash fee and additional 8,750 warrants at $1.00 per
share valued at $7,895 based on the following assumptions: term of 5 years, a
risk-free interest rate of 4.52%, a dividend yield of 0% and volatility of
146%. In May 2008 the Company updated the agreement prospectively
with the placement agent to increase both the cash and warrant placement fees
from 7% to 9% as well as to provide to the placement agent a 2.5% cash expense
allowance.
During
June, 2008, the Company issued 400,000 shares of common stock and raised
$354,000, net of placement fees, through this offering. The 300,000
warrants issued in connection with the units were valued at $271,438 using the
Black-Scholes option pricing model with the following assumptions: term of 5
years, a risk-free interest rate of 3.88%, a dividend yield of 0% and volatility
of 111%. Issuance costs consisted of a 9% cash fee, 2.5% expense
allowance and 36,000 warrants at $1.00 per share valued at $38,761 based on the
following assumptions: term of 5 years, a risk-free interest rate of 4.52%, a
dividend yield of 0% and volatility of 146%.
During
July and August, 2008, the Company issued 580,500 shares of common stock and
raised $513,743, net of placement fees, through this offering. The
435,375 warrants issued in connection with the units were valued at $468,931
using the Black-Scholes option pricing model with the following assumptions:
term of 5 years, a risk-free interest rate of 3.88%, a dividend yield of 0% and
volatility of 110-116%. Issuance costs consisted of a 9% cash fee,
2.5% expense allowance and 52,245 warrants at $1.00 per share valued at $44,812
based on the following assumptions: term of 5 years, a risk-free interest rate
of 3.88%, a dividend yield of 0% and volatility of 110-116%.
On
February 12, 2008, the Company entered into a consulting agreement with New
Castle Consulting. Pursuant
to this agreement, New Castle will provide investor relations services to the
Company for a period of 6 months in exchange for payment of $4,500, which was
made in conjunction with the execution of the agreement, a monthly fee of $4,500
the payment of which began in March 2008, the issuance of 100,000 shares of
restricted common stock valued at $100,000 and an indemnity. As the
shares were unforfeitable upon issuance and there was no guarantee of future
benefit to be provided, the value of the shares was expensed upon issuance
to investor relations and other related
consulting expense.
On
February 14, 2008, the Company entered into a consulting agreement with Kulman
IR. Pursuant to this agreement, Kulman will provide investor
relations services to us for a period of 12 months in exchange for a monthly fee
of $3,500, the issuance of 100,000 shares of restricted common stock valued at
$100,000, the payment of pre-approved expenses incurred by Kulman in discharging
its obligations under the agreement and cross-indemnities. In regards
to the stock that was issued, 50,000 shares vested immediately, 25,000 shares
vested on August 7, 2008 and the remaining 25,000 shares were to vest on October
7, 2008. During August 2008, the Company terminated the agreement and
cancelled the 25,000 unvested shares. As there was no guarantee of
future benefit to be provided, the value of the vested shares of $100,000 was
expensed in 2008 to investor relations and other related
consulting.
On July
15, 2008, the Company entered into a consulting agreement with Frontier Capital
Partners L.L.C. (“Frontier”) pursuant to which Frontier agreed to provide
investor relations and other business advisory services. The agreement term was
3 months, but the agreement could be terminated by either party upon 5 days
written notice. The agreement also includes provisions allowing immediate
termination in the event of dissolution, bankruptcy or insolvency and for cause.
The Company agreed to issue to Frontier 125,000 shares of its restricted common
stock as compensation for these services. 75,000 of these shares, valued at
$81,000, were issued immediately (upon execution of the agreement) and are
deemed to be a non-refundable retainer. The remaining 50,000 shares, valued at
$63,000, were issued 46 days after execution of the agreement. As the shares
were unforfeitable upon issuance and there was no guarantee of future benefit to
be provided, the value of the shares was expensed in 2008 to investor relations
and other related consulting.
On August
14, 2008, a holder of warrants to purchase 98,121 shares of common stock of the
Company at a price of $1.01 per share exercised the warrants under Section 3(c)
of the warrant document which allows for cashless exercise of the
warrants. As a result, the Company issued 37,985 shares of its common
stock.
See Note
7 for additional shares issued during the year ended December 31, 2008 related
to the convertible notes payable.
F-37
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
6 – STOCKHOLDERS’ DEFICIT (Continued)
Stock
warrants
On
November 11, 2008, the Company entered into a consulting agreement with Newview
Consulting L.L.C. (“Newview”) Pursuant to this agreement, Newview will provide
investor relations services for a period of 6 months in exchange for warrants to
purchase 2,250,000 shares of common stock at a price of $1.25 per share. 900,000
warrants vested immediately with an estimated fair value of $716,997 using the
Black-Scholes pricing model, and 270,000 warrants vest on the 1st of each
month beginning December 1, 2008 and ending April 1, 2009. The
270,000 warrants that vested on December 1, 2008 had an estimated fair value of
$204,619 using the Black Scholes pricing model. These warrants have
been expensed to investor relations and other related consulting services.
Either party may terminate the agreement with fifteen days written
notice. At December 31, 2008, 1,080,000 warrants are unvested and
forfeitable.
On
October 30, 2008, the Company executed a letter of intent with a subsidiary of
Guthy-Renker (“GRM”) to create, market and distribute direct response
advertisements to sell the Company’s product. GRM is responsible for
creating, financing, producing, testing and evaluating a radio commercial to
market the Company’s products in exchange for $50,000 and fully vested,
non-forfeitable warrants to purchase 1,000,000 shares of common stock at a price
of $1.25 per share with an estimated fair value of $951,495 using the
Black-Scholes pricing model. The fair value of these warrants has
been capitalized at the time of issuance and will be expensed over the five
month expected term of service. For the
year ended December 31, 2008, the Company has expensed $380,598 to selling,
general and administrative expense. The letter also allows the parties
the option to elect to have GRM create television commercials to market the
Company’s product in exchange for additional warrants to purchase 1,000,000
shares of common stock at a price of $1.25 per share. Subsequent
to December 31, 2008, the Company has entered into a Media and Marketing
Services Agreement with GRM as more fully disclosed in Note
12.
The
following represents a summary of the warrants outstanding at December 31,
2008 and 2007 and changes during the years then ended:
Year
Ended
|
||||||||||||||||||||||||
December
31, 2008
|
December
31, 2007
|
|||||||||||||||||||||||
Weighted
|
||||||||||||||||||||||||
Average
|
Aggregate
|
Number
|
Average
|
Aggregate
|
||||||||||||||||||||
Exercise
|
Intrinsic
|
of
|
Exercise
|
Intrinsic
|
||||||||||||||||||||
Warrants
|
Price
|
Value
|
Warrants
|
Prices
|
Value
|
|||||||||||||||||||
Outstanding
and exercisable, beginning of year
|
5,741,306 | $ | 1.05 | 4,337,931 | $ | 1.05 | ||||||||||||||||||
Issued
|
5,386,705 | $ | 1.24 | 1,403,375 | $ | 1.21 | ||||||||||||||||||
Expired/forfeited
|
— | — | — | — | ||||||||||||||||||||
Exercised
|
(98,121 | ) | $ | 1.01 | — | — | ||||||||||||||||||
Outstanding,
end of year
|
11,029,890 | $ | 1.14 | 5,741,306 | $ | 1.05 | ||||||||||||||||||
Exercisable,
end of year
|
9,949,890 | $ | 1.13 | — | 5,741,306 | $ | 1.05 | — | ||||||||||||||||
Weighted
average fair value of warrants issued and exercisable
|
$ | 0.84 | $ | 0.99 |
The
following table summarizes information about warrants outstanding at
December 31, 2008:
Weighted
|
||||||||
Average
|
||||||||
Number
of
|
Remaining
|
|||||||
Warrant
|
Contractual
|
|||||||
Exercise
Price
|
Shares
|
Life
(Years)
|
||||||
$ 1.00
|
3,806,600
|
2.82
|
||||||
$ 1.01
|
779,432
|
6.94
|
||||||
$ 1.20
|
400,000
|
3.50
|
||||||
$ 1.25
|
6,043,858
|
4.66
|
||||||
11,029,890
|
The
outstanding warrants at December 31, 2008 are held by consultants and other
service providers, stockholders, and former note-holders.
F-38
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
6 – STOCKHOLDERS’ DEFICIT (Continued)
Stock
options
In
January 2005, the Company adopted the CyberDefender Corporation 2005 Stock
Option Plan (sometimes called the CyberDefender Corporation 2005 Equity
Incentive Plan and referred to herein as the “2005 Plan”), which consists of
equity programs that provide for the granting of Incentive Stock Options or
Nonstatutory Stock Options, the issuance of stock appreciation rights, stock
purchase rights and awards of stock. Under the terms of the 2005 Plan, the
exercise price of options granted may be equal to, greater than or less than the
fair market value on the date of grant, the options have a maximum term of ten
years and generally vest over a period of service or
attainment of specified performance objectives. The maximum aggregate amount of
options that may be granted from the 2005 Plan is 931,734
shares.
On
October 30, 2006, the Company adopted the Amended and Restated 2006 Equity
Incentive Plan (“2006 Plan”) that provides for the granting of Incentive Stock
Options or Nonstatutory Stock Options, the issuance of stock appreciation
rights, stock purchase rights and awards of stock. Under the terms of the 2006
Plan, the exercise price of options granted may be equal to, greater than
or less than the fair market value on the date of grant, the options may have a
maximum term of ten years and generally vest over a period of service or
attainment of specified performance objectives. The maximum aggregate amount of
stock based awards that may be granted from the 2006 Plan is 1,375,000
shares.
On March
31, 2008, the Company granted to Michael Barrett, the Company’s Chief Financial
Officer, an option to purchase 20,000 shares of common stock under the 2006
Plan, at a price of $1.00 per share with an estimated fair value of $17,344
using the Black-Scholes option pricing model with the following assumptions:
expected term of 5.1 years, a risk-free interest rate of 4.62%, a dividend yield
of 0%, volatility of 128% and a forfeiture rate of 4%.
On April
16, 2008, the Company granted to Michael Barrett, the Company’s Chief Financial
Officer, an option to purchase 20,000 shares of common stock under the 2006
Plan, at a price of $1.00 per share with an estimated fair value of $17,269
using the Black-Scholes option pricing model with the following assumptions:
expected term of 5.1 years, a risk-free interest rate of 2.84%, a dividend yield
of 0%, volatility of 169% and a forfeiture rate of 4%.
On April
16, 2008, the Company granted to Steve Astere, a consultant, an option to
purchase 15,700 shares of common stock under the 2006 Plan, at a price of $1.25
per share with an estimated fair value of $9,115 using the Black-Scholes option
pricing model with the following assumptions: expected term of 2.50 years, a
risk-free interest rate of 2.09%, a dividend yield of 0%, volatility of 118% and
a forfeiture rate of 0%.
On April
16, 2008, the Company granted to Tawab Rahmani, a consultant, an option to
purchase 75,000 shares of common stock under the 2006 Plan, at a price of $1.00
per share with an estimated fair value of $46,380 using the Black-Scholes option
pricing model with the following assumptions: expected term of 2.50 years, a
risk-free interest rate of 2.09%, a dividend yield of 0%, volatility of 118% and
a forfeiture rate of 0%.
On April
16, 2008, the Company granted to Sean Whiteley, a consultant, an option to
purchase 40,000 shares of common stock under the 2006 Plan, at a price of $1.00
per share with an estimated fair value of $27,131 using the Black-Scholes option
pricing model with the following assumptions: expected term of 3.25 years, a
risk-free interest rate of 2.28%, a dividend yield of 0%, volatility of 118% and
a forfeiture rate of 0%.
In June
2008, the Company granted to employees, options to purchase 160,000 shares of
common stock under the 2006 Plan, at prices ranging from $1.01 to $1.10 per
share with an estimated fair value of $167,319 using the Black-Scholes option
pricing model with the following assumptions: expected term of 6.1 years, a
risk-free interest rate of 3.54% to 3.84%, a dividend yield of 0%, volatility of
166-167% and a forfeiture rate of 4% to 20%.
On August
6, 2008, the Company granted to Michael Barrett, the Company’s Chief Financial
Officer, an option to purchase 10,000 shares of common stock under the 2006
Plan, at a price of $1.30 per share with an estimated fair value of $12,094
using the Black-Scholes option pricing model with the following assumptions:
expected term of 5.1 years, a risk-free interest rate of 3.24%, a dividend yield
of 0%, volatility of 158% and a forfeiture rate of 4%.
In August
and September 2008, the Company granted to employees, options to purchase 75,000
shares of common stock under the 2006 Plan, at prices ranging from $1.07 to
$1.44 per share with an estimated fair value of $89,826 using the Black-Scholes
option pricing model with the following assumptions: expected term of 5-6 years,
a risk-free interest rate of 2.88% to 3.23%, a dividend yield of 0%, volatility
of 157-161% and a forfeiture rate of 20%.
On August
1, 2008, the Company granted to Bing Liu, a consultant and member of the
Company’s Board of Directors, an option to purchase 12,500 shares of common
stock under the 2006 Plan, at a price of $1.00 per share with an estimated fair
value of $14,541 using the Black-Scholes option pricing model with the following
assumptions: expected term of 5.1 years, a risk-free interest rate of 3.25%, a
dividend yield of 0%, volatility of 158% and a forfeiture rate of
4%.
On
October 1, 2008, the Company granted to Michael Barrett, the Company’s Chief
Financial Officer, an option to purchase 10,000 shares of common stock under the
2006 Plan, at a price of $1.00 per share with an estimated fair value of $10,083
using the Black-Scholes option pricing model with the following assumptions:
expected term of 5.1 years, a risk-free interest rate of 2.88%, a dividend yield
of 0%, volatility of 153% and a forfeiture rate of 4%.
On
October 1, 2008, the Company granted to Kevin Harris, a consultant, an option to
purchase 35,000 shares of common stock under the 2006 Plan, at a price of $1.00
per share with an estimated fair value of $35,319 using the Black-Scholes option
pricing model with the following assumptions: expected term of 5.1 years, a
risk-free interest rate of 2.89%, a dividend yield of 0%, volatility of 153% and
a forfeiture rate of 4%.
On
December 1, 2008, the Company granted to Michael Barrett, the Company’s Chief
Financial Officer, an option to purchase 2,500 shares of common stock under the
2006 Plan, at a price of $1.00 per share with an estimated fair value of $2,748
using the Black-Scholes option pricing model with the following assumptions:
expected term of 5.0 years, a risk-free interest rate of 1.71%, a dividend yield
of 0%, volatility of 153% and a forfeiture rate of 4%.
In
October and December 2008, the Company granted to employees, options to purchase
27,500 shares of common stock under the 2006 Plan, at prices ranging from $1.20
to $1.28 per share with an estimated fair value of $31,401 using the
Black-Scholes option pricing model with the following assumptions: expected
terms of 6.0 years, a risk-free interest rate of 1.53% to 3.02%, a dividend
yield of 0%, volatility of 154-157% and forfeiture rates of
0-20%.
F-39
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
6 – STOCKHOLDERS’ DEFICIT (Continued)
A summary
of stock option activity for the 2005 Plan and 2006 Plan is as
follows:
Year
Ended
|
||||||||||||||||||||||||||||||||
December
31, 2008
|
December
31, 2007
|
|||||||||||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||||||||||
Weighted
|
Average
|
Weighted
|
Average
|
|||||||||||||||||||||||||||||
Number
|
Average
|
Remaining
|
Aggregate
|
Number
|
Average
|
Remaining
|
Aggregate
|
|||||||||||||||||||||||||
Of
|
Exercise
|
Contractual
|
Intrinsic
|
of
|
Exercise
|
Contractual
|
Instrinsic
|
|||||||||||||||||||||||||
Options
|
Price
|
Term
|
Value
|
Options
|
Prices
|
Term
|
Value
|
|||||||||||||||||||||||||
Outstanding,
beginning of year
|
1,316,384 | $ | 0.75 | 1,441,613 | $ | 0. 75 | ||||||||||||||||||||||||||
Granted
|
503,200 | $ | 1.09 | 350,500 | $ | 1.06 | ||||||||||||||||||||||||||
Exercised
|
(50,000 | ) | $ | 0.01 | - | - | ||||||||||||||||||||||||||
Cancelled
|
(325,500 | ) | $ | 1.05 | (475,729 | ) | $ | 0.98 | ||||||||||||||||||||||||
Outstanding,
end of year
|
1,444,084 | $ | 0.83 | 7.66 | 649,905 | 1,316,384 | $ | 0.75 | 8.52 | 732,532 | ||||||||||||||||||||||
Vested
and expected to vest in the future at December 31, 2008
|
1,355,037 | $ | 0.81 | 7.55 | 635,011 | 1,244,633 | $ | 0.73 | 8.47 | 712,730 | ||||||||||||||||||||||
Exercisable,
end of year
|
1,080,662 | $ | 0.73 | 7.25 | 582,098 | 1,087,717 | $ | 0.68 | 8.37 | 672,930 |
The
weighted-average grant date fair value of options granted during the years ended
December 31, 2008 and 2007 was $0.96 and $0.93 per option share,
respectively.
As of
December 31, 2008 and 2007, 274,375 and 228,667 of the options granted are
not vested with an estimated remaining value of $52,913 and $164,219,
respectively. At
December 31, 2008 and 2007, the remaining value of non vested options granted is
expected to be recognized over the weighted average vesting period of 2.95 and
2.77 years, respectively.
The
Company recorded compensation expense associated with the issuance and
vesting of stock options of $252,943 and $498,431 for the years ended
December 31, 2008 and 2007, respectively.
During
the year ended December 31, 2008, 50,000 of employee stock options were
exercised for total proceeds to the Company of $535. No options were
exercised during the year ended December 31, 2007.
NOTE
7 – CONVERTIBLE NOTES PAYABLE
On
September 12, 2006, the Company entered into a Securities Purchase Agreement
with 13 accredited investors pursuant to which it sold 10% secured convertible
debentures (the “Debentures”) in the aggregate principal amount of $3,243,378
and common stock purchase warrants to purchase an aggregate of 3,243,378 shares
of the Company’s common stock at $1.00 per share (the “Base Conversion Price”)
that also included a registration rights agreement. The debenture holders have
the right to convert the Debentures into 3,243,378 shares of common stock.
The Debentures mature on September 12, 2009 and bear interest at the rate of 10%
per year, payable quarterly. If, during the time that the Debentures
are outstanding, the Company sells or grants any option to purchase (other than
options issued pursuant to a plan approved by our board of directors), or sells
or grants any right to reprice its securities, or otherwise disposes of or
issues any common stock or common stock equivalents entitling any person to
acquire shares of the Company’s common stock at a price per share that is lower
than the conversion price of the debentures or that is higher than the Base
Conversion Price but lower than the daily volume weighted average price of the
common stock, then the conversion price of the Debentures will be reduced. As of
December 31, 2008, the conversion price of the Debentures has not been
reduced.
Under the
terms of the agreement, the Company is obligated to register for resale at least
130% of the shares of its common stock issuable upon the conversion of the
Debentures and the exercise of the common stock purchase warrants. However, the
agreement also prohibits the Company from registering shares of common stock on
a registration statement that total more than one-half of the issued and
outstanding shares of common stock, reduced by 10,000 shares.
If a
registration statement was not filed within 30 days of the sale of the
Debentures, or was not effective 120 days from the date of the sale
of the Debentures, which was January 10, 2007, or if the Company did
not respond to an SEC request for information during the registration period
within 10 days of notice, the Company was required to pay to each holder of its
Debentures an amount in cash, as partial liquidated damages and not as a
penalty, equal to 1.5% of the aggregate subscription amount paid by each holder.
The Company, (1) will not be liable for liquidated damages with respect to any
warrants or warrant shares, (2) in no event will the Company be liable for
liquidated damages in excess of 1.5% of the aggregate subscription amount of the
holders in any 30-day period, and (3) the maximum aggregate liquidated damages
payable to a holder is 18% of the aggregate subscription amount paid by such
holder up to a maximum aggregate liquidated damages of 18% of the total amount
of the secured convertible debentures, or $583,808. If the Company fails to pay
any partial liquidated damages in full within seven days after the date payable,
the Company will pay interest at a rate of 18% per annum to the holder, accruing
daily from the date such partial liquidated damages are due until such amounts,
plus all such interest, are paid in full. The partial liquidated damages apply
on a daily pro-rata basis for any portion of a month.
Pursuant
to Amendments No. 1 and No. 2 to the Registration Rights Agreement, the holders
of the Company’s Debentures agreed to extend the filing date of the registration
statement to November 3, 2006, and agreed to waive their rights to enforce the
liquidated damages clause for the initial filing of the registration statement.
The Company did not meet the 10 day response period for responding to an SEC
request for additional information nor did the Company meet the target
registration statement effectiveness date of January 10, 2007. The holders did
not agree to waive the liquidated damages that accrued due to the Company’s
failure to meet the 10 day period for responding to an SEC request for
additional information nor have the holders agreed to waive the liquidated
damages that accrued due to the Company’s failure to have the registration
statement declared effective by January 10, 2007.
In
accordance with FASB Staff Position Emerging Issues Task Force (“FSP EITF”)
00-19-02, “Accounting for Registration Payment Arrangements,” the
Company believed, at the time the Debentures were issued, that it was probable
that it would be in violation of certain filing provisions within the
Registration Rights Agreement and recorded $111,897 as a discount to the
Debentures. At December 31, 2006, the Company estimated its
liquidated damages to be $225,415 and therefore recorded an additional expense
of $113,518 in loss on registration rights agreement in the statement of
operations. On March 23, 2007 the Company entered into a Consent and
Waiver agreement as more fully described below that determined the actual
liquidated damages to be $169,917 calculated through March 23, 2007 and covering
the period through April 30, 2007, resulting in a $55,498 decrease to the
liability.
F-40
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
7 – CONVERTIBLE NOTES PAYABLE (Continued)
The
Company was also required to make an interest payment to the Debenture holders
on April 1, 2007. The Consent and Waiver allowed the Company to make
the April 1 interest payment and pay the liquidated damages in one of two ways
to be chosen by each holder. For payment of the Debenture holder’s pro rata
portion of the April 1 interest payment, the Debenture holder could choose to
increase the principal amount of his Debenture by his pro-rata share of the
accrued interest amount or accept shares of the Company’s common stock valued at
$0.85 per share for this purpose. For payment of the Debenture holders pro rata
portion of the liquidated damages, each Debenture holder has the same choice,
that is, either to increase his Debenture by the pro rata liquidated damages
amount or accept shares of the Company’s common stock valued at $0.85 per share
for this purpose. If all the Debenture holders were to choose to accept shares
of the Company’s common stock in payment of the April 1 interest payment and the
liquidated damages, the Company could be required to issue up to a total of
566,336 shares of the Company’s common stock. The Consent and Waiver allowed the
Company to issue these shares without triggering the anti-dilution rights
included in the original offering documents. The Company issued
180,187 shares in November and December 2007 as partial payment for these
liquidated damages valued at $153,167. At December 31, 2007, $16,750
of these damages remained in accrued expenses – registration rights
agreement. The Company issued 15,407 shares in January and February
2008 as partial payment for these liquidated damages valued at
$13,097. At December 31, 2008, $3,657 of these damages remained in
accrued expenses – registration rights agreement. The Company issued
190,090 shares in November and December 2007 as partial payment for the April 1,
2007 interest payment of $161,580. At December 31, 2007, $17,179
remained in accrued interest. The Company issued 15,669 shares in
January and February 2008 as partial payment for the April 1 interest payments
of $13,319. At December 31, 2008, $3,860 remained in accrued
interest.
The
Consent and Waiver allowed the Company to issue to Oceana Partners, LLC, without
triggering the anti-dilution rights, 50,000 shares of common stock in
consideration for research coverage for a 12-month period.
The
Company did not meet the April 30, 2007 date for its registration statement to
be declared effective by the SEC. The registration statement became effective on
July 19, 2007. As a result, the Company incurred additional liquidated damages
for the period May 1 through July 19, 2007 of $132,726. On September
21, 2007 the Company received from the holders of the Debentures a second
Consent and Waiver. The holders of the Debentures agreed to accept shares of the
Company’s common stock at $0.85 per share instead of cash as payment
for the interest due on July 1, 2007 and October 1, 2007 and for damages
incurred under the Registration Rights Agreement. The Company issued 135,063
shares in February 2008 as partial payment for these liquidated damages valued
at $106,518. At December 31, 2008, $26,213 of these damages remained
in accrued expenses – registration rights agreement. The Company
issued 94,952 shares in February 2008 as partial payment for the July 1 and
October 1, 2007 interest payments of $110,147. At December 31, 2008,
$32,504 remained in accrued interest.
The
Company did not meet the August 18, 2007 date to file a second registration
statement. As a result, the Company incurred additional liquidated damages for
the period August 18 through December 19, 2007 of $194,603. The
Company received from the holders of the Debentures a third Consent and Waiver,
dated February 13, 2008 and amended on August 19, 2008. The third Consent and
Waiver waived the requirement included in the Debentures and the Registration
Rights Agreement that the Company file a second registration statement, waived
the liquidated damages that accrued from and after December 19, 2007 and waived
the payment of any interest that would have accrued on the liquidated damages.
The holders of the Debentures agreed to accept either additional debentures or
shares of the Company’s common stock at $0.85 per share instead of
cash as payment for the interest due on January 1, 2008 and as payment of the
liquidated damages accrued prior to December 19, 2007 under the Registration
Rights Agreement. In August 2008, a holder of the 10% Secured Convertible
Debentures converted $6,000 of accrued liquidated damages into 6,000 shares of
common stock as more fully described below. In September 2008, the Company
issued $64,422 in additional debentures as payment of liquidated damages, which
included $4,422 of penalty interest, and $26,868 in additional debentures as
payment for quarterly interest due on January 1, 2008, which included $1,868 of
penalty interest. The additional debentures had a term of 18 months and are
convertible at $0.85 per share. During October and December 2008, the
Company issued $349,494 in additional debentures as payment of liquidated
damages, quarterly interest, and penalty interest. These additional
debentures also have a term of 18 months and are convertible at $0.85 per share.
The Company issued 3,750 shares in December 2008 as partial payment for these
liquidated damages valued at $3,750. At December 31, 2008, $4,732
remained in accrued expenses – registration rights agreement and $1,972 remained
in accrued interest.
According
to the terms of the Debentures, the Company is to make interest payments
quarterly on January 1, April 1, July 1 and October 1 until September 2009, when
the principal amount and all accrued but unpaid interest will be
due. To date, holders of the Debentures have agreed to accept the
Company’s securities as payment of the interest obligation, in lieu of
cash. The Company failed to make the interest payments that were due
on April 1, and July 1, 2008, totaling $139,169. On September 22, 2008 the
Company received from the holders of the Debentures a fourth Consent and Waiver
of defaults of the Debentures. The holders of the Debentures agreed to accept
either additional debentures or shares of the Company’s common stock at
$0.85 per share instead of cash as payment for the interest due on
April 1, July 1, and October 1, 2008, totaling $205,740. In August
2008, certain holders of the Debentures converted $8,694 of accrued interest
into 8,694 shares of common stock as more fully described below. During October
and December 2008, the Company issued $349,494 in additional debentures as
payment of liquidated damages, quarterly interest, and penalty
interest. The additional debentures have a term of 18 months and are
convertible at $0.85 per share. The Company issued 6,250 shares in December 2008
as partial payment for interest valued at $6,250. At December 31,
2008, $5,915 remained in accrued interest.
The
Company recorded $65,696 in accrued interest as of December 31, 2008 for the
January 1, 2009 interest payment.
The
holders of certain shares and warrants for the purchase of common stock issued
in conjunction with the sale of the Company’s previously issued Secured
Convertible Promissory Notes from November 2005 through March 2006, which were
converted on September 12, 2006, also have certain registration rights. These
holders agreed to defer their rights to require registration of their securities
on the registration statement the Company filed; however, they have maintained
the rights to piggyback on future registration statements filed by the
Company.
The
Company has accounted for the Debentures according to Statement of Financial
Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative Instruments and
Hedging Activities,” EITF 00-19 “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock,” FSP EITF
00-19-2, EITF 98-5 “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27 “Application
of Issue No. 98-5 to Certain Convertible Instruments.” The Company has accounted
for the registration rights arrangement under the guidance of FSP EITF 00-19-2
and the warrants as permanent equity under the guidance of SFAS No. 133 and
EITF 00-19. The value of the Debentures was allocated between the Debentures,
the registration rights arrangement and the warrants, including the beneficial
conversion feature, which amounted to $63,689, $111,897 and $3,067,792,
respectively. The discount of $3,179,689 related to the registration rights
arrangement and the warrants, including the beneficial conversion feature, is
being amortized over the term of the Debentures. The Company amortized
$1,071,060 and $1,316,925 to interest expense for the years ended December 31,
2008 and 2007. The remaining unamortized warrant and beneficial conversion
feature value is recorded as a discount on the Debentures on the accompanying
balance sheet.
F-41
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
7 – CONVERTIBLE NOTES PAYABLE (Continued)
In
addition, as part of the transaction, the Company paid $217,000, issued
1,000,515 shares of common stock in November 2006 valued at $1,000,515 and
issued 217,000 unit purchase options with each unit consisting of 1 share of
common stock and a warrant to purchase 1 share of common stock for $1.00 per
share in November 2006. The unit purchase options were valued at $374,531 using
the Black-Scholes option pricing model with the following assumptions: term of 5
years, a risk-free interest rate of 4.62%, a dividend yield of 0%, and
volatility of 128%. These costs, totaling $1,592,046, are being amortized over
the term of the Debentures. The Company recorded amortization of
$535,448 and $658,789 to interest expense during the years ended December 31,
2008 and 2007 related to the Debentures. The unamortized amount is recorded as
part of the deferred financing costs in the accompanying balance
sheets.
In
November and December 2007, certain holders of the Debentures converted $460,000
of principal and $48,406 of accrued interest into 508,406 shares of common stock
at $1.00 per share. The unamortized discount of $253,481 on the converted notes
was recorded as interest expense at the time of the conversion.
In August
2008, certain holders of the Debentures converted $300,000 of principal and
$15,468 of accrued interest, accrued liquidated damages and penalty interest
into 315,468 shares of common stock at $1.00 per share and 86,601 warrants to
purchase shares of the Company’s common stock at $1.25 per share. The
unamortized discount of $103,310 on the converted notes was recorded as interest
expense at the time of the conversion.
In
November and December 2008, certain holders of the Debentures converted $481,408
of principal into 481,408 shares of common stock at $1.00 per
share. The unamortized discount of $121,673 on the converted notes
was recorded as interest expense at the time of the conversion.
On
November 21, 2008, the Company entered into a fifth Consent and Waiver agreement
whereby the holders of the Debentures agreed to allow the Company to sell up to
$1,200,000 in aggregate principal amount of the Company’s 10% Convertible
Promissory Notes, due eleven months from the date of issuance and convertible
into shares of Common Stock at a conversion price of $1.25 per share. In
consideration of the Waiver and the consent provided by the holders, the Company
agreed to accelerate the maturity date of the 18 month 10% convertible
debentures to September 12, 2009 and the Company agreed and acknowledged that
the 2006 Warrant Shares and the shares of Common Stock underlying the 18 month
10% convertible debentures issued or issuable to each of the holders in payment
of interest and liquidated damages pursuant to prior consent and waiver
agreements shall carry “piggyback” registration rights.
Per the
Consent and Waiver discussed above, in November and December, 2008 the Company
entered into a Securities Purchase Agreement, that also included registration
rights, with certain accredited investors to which it sold 10% Convertible
Promissory Notes in the aggregate principal amount of $845,000, which may be
converted at the price of $1.25 per share (subject to adjustment as discussed
below) into an aggregate of 676,000 shares of common stock. In
conjunction with the sale of the 10% Convertible Promissory Notes, the Company
issued common stock purchase warrants to purchase an aggregate of 338,000 shares
of common stock at $1.25 per share.
If,
during the time that the 10% Convertible Promissory Notes are outstanding, we
sell or grant any option to purchase (other than options issued to our
employees, officers, directors or consultants), or sell or grant any right to
re-price our securities, or otherwise dispose of or issue any common stock or
common stock equivalents entitling any person to acquire shares of our common
stock at a price per share that is lower than the conversion price of these
notes (which, for purposes of this discussion will be designated as the “Base
Conversion Price”), then the conversion price of the 10% Convertible Promissory
Notes will be reduced according to the following weighted average
formula: the conversion price will be multiplied by a fraction of the
denominator of which will be the number of shares of common stock outstanding on
the date of the issuance plus the number of additional shares of common stock
offered for purchase and the numerator of which will be the number of shares of
common stock outstanding on the date of such issuance plus the number of shares
which the aggregate offering price of the total number of shares so offered
would purchase at the conversion price. A reduction in the conversion
price resulting from the foregoing would allow holders of our 10% Convertible
Promissory Notes to receive more than 676,000 shares of our common stock upon
conversion of the outstanding principal amount. In that case, an
investment in our common stock would be diluted to a greater extent than it
would be if no adjustment to the conversion price were required to be
made.
The value
of the 10% Convertible Promissory Notes was allocated between the Debentures and
the warrants, including the beneficial conversion feature, which amounted to
$399,533 and $445,467, respectively. The discount of $445,467 related to the
warrants, including the beneficial conversion feature, is being amortized over
the term of the 10% Convertible Promissory Notes. The Company amortized $56,525
to interest expense for the year ended December 31, 2008. The remaining
unamortized warrant and beneficial conversion feature value is recorded as a
discount on the 10% Convertible Promissory Notes on the accompanying balance
sheet. At December 31, 2008, $6,885 of interest has been accrued on these
notes.
In
addition, as part of the transaction, the Company paid $50,700 and issued common
stock purchase warrants to purchase an aggregate of 50,700 shares of common
stock at $1.25 per share. The warrants were valued at $47,498 using the
Black-Scholes option pricing model with the following assumptions: term of 5
years, a risk-free interest rate of 3.81%, a dividend yield of 0%, and
volatility of 99-103%. These costs, totaling $98,198, are being amortized over
the term of the 10% Convertible Promissory Notes. The Company
recorded amortization of $12,603 to interest expense during the year ended
December 31, 2008. The unamortized amount is recorded as part of the deferred
financing costs in the accompanying balance sheets.
Convertible
notes payable consist of the following:
December
31, 2008
|
December
31, 2007
|
|||||||
10%
debentures outstanding
|
$
|
3,287,754
|
$
|
2,783,378
|
||||
Unamortized
discount on debentures
|
(866,225
|
)
|
(1,548,343
|
)
|
||||
Convertible
notes payable, net
|
$
|
2,421,529
|
$
|
1,235,035
|
At
December 31, 2008, all debt is shown as current as it is due before December 31,
2009.
F-42
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
8 – NOTES PAYABLE
7.41% Senior Secured
Original Issue Discount Notes
In April
and May 2007, the Company sold $405,000 in face amount of its 7.41% Senior
Secured Original Issue Discount Notes (“7.41% Notes”) and warrants to purchase
187,500 shares of the Company’s common stock for a purchase price of $375,000.
The 7.41% Notes are due one year from issuance with interest at 7.41% payable at
maturity. One warrant to purchase 5 shares of the Company’s common stock was
issued for every $10 of purchase price paid. The warrants may be exercised at a
price of $1.20 per share for a period of 5 years beginning nine months after
issuance of the warrant. Pursuant to the warrant agreements, if the
Company issues common stock or common stock equivalents at a price lower than
the warrant exercise price (the “Base Share Price”), then the warrant exercise
price will be reduced to equal the Base Share Price and the number of warrant
shares issuable will be increased so that the aggregate exercise price, after
taking into account the decrease, will be equal to the aggregate exercise price
prior to the adjustment. As of December 31, 2008, the exercise price
per share of the warrants has not been reduced as a result of the issuance of
any of the Company’s common stock or common stock equivalents. The Company has
accounted for the debentures according to SFAS 133, EITF 00-19, EITF 98-5 and
EITF 00-27. The Company has accounted for the warrants as permanent equity under
the guidance of SFAS 133 and EITF 00-19. The value of the 7.41% Notes was
allocated between the original issue discount (“OID”), the warrants and the
debentures which amounted to $30,000, $112,229 and $262,771, respectively. The
discount related to the OID and warrants of $142,229 will be amortized over the
one year term of the 7.41% Notes. The warrants issued in connection with the
7.41% Notes were valued using the Black-Scholes option pricing model with
the following assumptions: term of 5 years, a risk-free interest rate of 4.69%,
a dividend yield of 0% and volatility of 124%.
In August
2007, the Company sold $297,000 in face amount of the 7.41% Notes and warrants
to purchase 137,500 shares of the Company’s common stock for a purchase price of
$275,000. The value of the 7.41% Notes was allocated between the OID, the
warrants and the debentures which amounted to $22,000, $86,020 and $188,980,
respectively. The discount related to the OID and the warrants of $108,020 will
be amortized over the term of the 7.41% Notes. The warrants issued in connection
with the 7.41% Notes were valued using the Black-Scholes option pricing
model with the following assumptions: term of 5 years, a risk-free interest rate
of 4.60%, a dividend yield of 0% and volatility of 134%.
In
October 2007, the Company sold $162,000 in face amount of the 7.41% Notes and
warrants to purchase 75,000 shares of the Company’s common stock for a purchase
price of $150,000. The value of the 7.41% Notes was allocated between
the OID, the warrants and the debentures which amounted to $12,000, $44,103
and $105,897, respectively. The discount related to the OID and the warrants of
$56,103 will be amortized over the term of the 7.41% Notes. The warrants issued
in connection with the 7.41% Notes were valued using the Black-Scholes
option pricing model with the following assumptions: term of 5 years, a
risk-free interest rate of 4.50%, a dividend yield of 0% and volatility of
116%.
The
Company recorded $158,702 and $147,650 of interest expense related to the
amortization of the discount related to the 7.41% Notes and warrants for the
years ended December 31, 2008 and 2007, respectively.
As part
of the March 23, 2007 Consent and Waiver, as described above in Note 7, the
holders of the Debentures agreed to allow the Company to sell the $864,000 face
amount of 7.41% Notes in exchange for warrants to purchase 150,000 shares of the
Company’s common stock at an exercise price of $1.00 per share. The warrants
were valued at $128,038 using the Black-Scholes option pricing model with the
following assumption: term of 5 years, a risk-free interest rate of 4.52%, a
dividend yield of 0% and volatility of 124%. These costs were recorded as
deferred financing costs and will be amortized over the term of the 7.41% Notes.
As part of the issuance of the 7.41% Notes certain officers of the Company
transferred to Oceana Partners and Carlin Capital 400,000 shares of common stock
valued at $1.00 per share. The value of $400,000 was recorded as deferred
financing cost and will be amortized over the term of the 7.41%
Notes. The transfer of shares from the officers was recorded in
additional paid-in capital.
The
Company recorded amortization of deferred financing costs of $154,011 and
$374,027 to interest expense related to the 7.41% Notes during the years ended
December 31, 2008 and 2007, respectively.
Pursuant
to the Registration Rights Agreement the Company signed in connection with the
offering of the 7.41% Notes, the Company was required to register 125% of the
number of shares underlying the related Warrants. The Company was required to
file a registration statement for this purpose within 180 days following the
date that the units were sold, and the Company would be in default of the
Registration Rights Agreement if it failed to file the registration statement
within 30 days following the expiration of the 180 day period. The Company
obtained a Consent and Waiver from the holders of the 7.41% Notes in relation to
the liquidated damages under the Registration Rights Agreement. As
more fully described below the Company issued 19,616 shares for payment of
$19,616 of liquidated damages. As of December 31, 2008 and 2007,
respectively the Company has recorded $19,143 and $16,821 in accrued expenses –
registration rights agreement.
On June
23, 2008, certain holders of the 7.41% Notes converted their notes in the face
amount of $216,000 plus accrued interest of $19,101 into 235,101 shares of the
Company’s common stock and warrants to purchase 190,498 shares of the Company’s
common stock at an exercise price of $1.25 per share. As the
Company’s negotiated conversion was at a price per share identical to the units
described in Note 7, no gain or loss was recorded upon the
conversion.
On August
6, 2008, certain holders of the 7.41% Notes converted their notes in the face
amount of $459,000 plus accrued interest of $31,032 and penalties of $19,616
into 509,648 shares of the Company’s common stock and warrants to purchase
368,059 shares of the Company’s common stock at an exercise price of $1.25 per
share. As the
Company’s negotiated conversion was at a price per share identical to the units
described in Note 7, no gain or loss was recorded upon the conversion.
The Company issued 67,027 warrants to purchase shares of common stock at $1.00
per share for a term of five years, valued at $81,723 per the Black Scholes
pricing model, to the placement agent for this conversion.
F-43
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
8 – NOTES PAYABLE (Continued)
During
the year ended December 31, 2008, the Company repaid the 7.41% Notes in the face
amount of $189,000 and accrued interest on those notes of $17,196. At
December 31, 2008 all of the 7.41% Notes were converted or paid in
full.
7.41%
Notes payable consist of the following:
December
31, 2008
|
December
31, 2007
|
|||||||
7.41%
notes outstanding
|
$
|
-
|
$
|
864,000
|
||||
Unamortized
discount on notes
|
-
|
(158,702
|
)
|
|||||
7.41%
notes payable, net
|
$
|
-
|
$
|
705,298
|
Note Payable to
Shareholder
In March
2008, Gary Guseinov pledged 750,000 shares of his common stock in CyberDefender
Corporation to Michael and Casey DeBaecke in exchange for a loan of $160,000,
bearing interest at the rate of 18% per annum, made to the Company. The pledge
was non-recourse to Mr. Guseinov in the event the collateral was foreclosed upon
due to the Company’s failure to pay the loan. So long as there was no event of
default in connection with the loan, Mr. Guseinov could continue to vote the
shares at any annual or special meeting of the shareholders. The loan was due to
be repaid on the earlier of two months from execution of the loan document or
two days following the Company’s receipt of over $500,000 in new equity capital.
Additionally, the Company issued warrants to purchase 40,000 shares of the
Company’s stock to the lenders. The warrants may be exercised at a price of
$1.25 per share for a period of 5 years. The discount related to the warrants of
$36,092 was amortized over the term of the note. The warrants issued in
connection with the note were valued using the Black-Scholes option pricing
model with the following assumptions: term of 5 years, a risk-free interest rate
of 4.52%, a dividend yield of 0% and volatility of 148%. The Company recorded
amortization of $36,092 to interest expense during the year ended December 31,
2008. The loan plus accrued interest was paid in full and the pledge cancelled
on July 30, 2008.
NOTE
9 - CAPITAL LEASE OBLIGATIONS
The
Company leases certain furniture and other equipment under leases with a bargain
purchase option through November 2012 at implicit rates ranging from 11.1% to
12.4%. The following is a schedule by fiscal years of the future minimum lease
payments under this capital lease together with the present value of the net
minimum lease payments at December 31, 2008:
2009
|
$
|
28,930
|
||
2010
|
9,447
|
|||
2011
|
6,753
|
|||
2012
|
6,185
|
|||
Total
minimum lease payments
|
51,315
|
|||
Less
amount representing interest
|
(7,248
|
)
|
||
Present
value of minimum capitalized payments
|
44,067
|
|||
Less
current portion
|
(27,291
|
)
|
||
Long-term
capital lease obligations
|
$
|
16,776
|
Property
and equipment included $105,924 and $103,562 and accumulated depreciation
included $49,623 and $31,002 acquired through capital leases as of December 31,
2008 and 2007, respectively. Depreciation expense of $18,621 and $13,608 is
included in the total depreciation expense for the years ended December 31, 2008
and 2007. Interest expense under the lease was $6,775 and $6,881 for the years
ended December 31, 2008 and 2007, respectively
NOTE
10 - RELATED PARTY TRANSACTIONS
Unionway
International, LLC, an entity controlled by Bing Liu, a former officer, provides
software development services to the Company. During the years ended December
31, 2008 and 2007, the Company paid Unionway International, LLC $92,000 and $0,
respectively. The Company continues to contract for the use of such services as
of the date of this filing.
The
Company had amounts due to two officers as of December 31, 2007 totaling
$22,165. This amount is included in accounts payable in the accompanying balance
sheet as of December 31, 2007 and was paid in 2008.
On
October 1, 2007, our Chief Executive Officer, Gary Guseinov, provided the
Company with a short-term loan in the amount of $28,078. The loan was repaid on
November 19, 2007.
On
November 5, 2007, the Company entered into a promissory note agreement with
Chris Carlin, the Company’s financial advisor, whereby Mr. Carlin loaned the
Company $35,000 at an interest rate of 7% per annum. The principal and accrued
interest was repaid prior to December 31, 2007.
In March
2008, Gary Guseinov pledged 750,000 shares of his common stock in CyberDefender
Corporation to Michael and Casey DeBaecke in exchange for a loan of $160,000
made to the Company. The pledge was non-recourse to Mr. Guseinov in
the event the collateral was foreclosed upon due to the Company’s failure to pay
the loan. So long as there was no event of default in connection with
the loan, Mr. Guseinov could continue to vote the shares at any annual or
special meeting of the shareholders. The loan plus accrued interest
was paid in full and the pledge cancelled on July 30, 2008.
F-44
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
11 - COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company's primary offices are in Los Angeles, California where it entered into a
lease on October 19, 2007 which commenced on March 24, 2008 for approximately
4,742 rentable square feet of office space which began upon completion of the
tenant improvements with a term of sixty-two months. The base rent is $10,670
per month for year one with 3% annual increases. The lease includes an abatement
of the first two months rent as long as the Company abides by all the terms and
conditions of the lease and if no event of default occurs. In the event the
Company fails to abide by all the terms and conditions of the lease or an event
of default occurs the Company shall reimburse the landlord for the abated rent
along with interest. Aside from the monthly rent, the Company is required to pay
its share of common operating expenses.
Previously,
the Company had entered into a lease for office space beginning September 1,
2004 and terminating August 31, 2007. The base rent was $10,619 per month for
2007.
As of
December 31, 2008, the Company's future minimum lease payments required under
the operating leases with initial or remaining terms in excess of one year are
as follows:
Years
Ending December 31,
|
||||
2009
|
$
|
166,185
|
||
2010
|
166,098
|
|||
2011
|
167,450
|
|||
2012
|
150,422
|
|||
2013
|
60,764
|
|||
Total
|
$
|
710,919
|
Total
rent expense for the years ended December 31, 2008 and 2007 was $111,026 and
$150,139, respectively, in selling, general and administrative
expense.
Employment
Agreements
On August
31, 2006, the Company entered into an employment agreement with Gary Guseinov
pursuant to which Mr. Guseinov will act as Chief Executive Officer. The
agreement is for three years and unless terminated within that period will renew
for successive one year periods until terminated. Mr. Guseinov receives
compensation of $225,000 per year and is entitled to participate in any bonus
compensation plan the Company adopts from time to time, so long as any such
bonus does not exceed more than 50% of his base salary for any 12-month
period.
On
November 23, 2005, the Company entered into an employment agreement with Igor
Barash pursuant to which Mr. Barash acts as Chief Information Officer. The
agreement is “at will” and can be terminated at any time. Mr. Barash receives
compensation of $140,000 per year.
On
November 30, 2006, the Company entered into temporary deferred salary
arrangements with Mr. Guseinov, Mr. Liu and Mr. Barash in which they agreed to
defer 50% of their salary each pay period. This arrangement can be terminated by
resolution of the Company’s Board of Directors. The Company has accrued $36,281
and $268,658 of deferred compensation as of December 31, 2008 and
2007.
Litigation
In the
ordinary course of business, the Company may face various claims brought by
third parties and the Company may, from time to time, make claims or take legal
actions to assert its rights, including intellectual property rights as well as
claims relating to employment and the safety or efficacy of its products. Any of
these claims could subject the Company to costly litigation and, while the
Company generally believes that it has adequate insurance to cover many
different types of liabilities, the Company’s insurance carriers may deny
coverage or the Company’s policy limits may be inadequate to fully satisfy any
damage awards or settlements. If this were to happen, the payment of any such
awards could have a material adverse effect on the Company’s operations, cash
flows and financial position. Additionally, any such claims, whether or not
successful, could damage the Company’s reputation and business. Management
believes the outcome of currently pending claims and lawsuits will not likely
have a material effect on the Company’s operations or financial
position.
Guarantees and
Indemnities
During
the normal course of business, the Company has made certain indemnities and
guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company’s officers, under which the Company may be required to indemnify such
person for liabilities arising out of their employment relationship. The
duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for
any limitation of the maximum potential future payments the Company could be
obligated to make. The Company hedges some of the risk associated with these
potential obligations by carrying general liability insurance. Historically, the
Company has not been obligated to make significant payments for these
obligations and no liabilities have been recorded for these indemnities and
guarantees in the accompanying statement of financial position.
On
October 30, 2006, the Company entered into Indemnification Agreements with Mr.
Guseinov, Mr. Ivankovich, the former Chief Financial Officer, Mr. Liu and Mr.
Barash, on November 6, 2007 the Company entered into an Indemnification
Agreement with Mr. John LaValle, a former director, and on February 1, 2008 the
Company entered into an Indemnification Agreement with Mr. Michael Barrett, all
of whom are sometimes collectively referred to in this discussion as the
“indemnified parties” or individually referred to as an “indemnified party.” The
agreements require the Company to provide indemnification for the indemnified
parties for expenses (including attorneys’ fees, expert fees, other professional
fees and court costs, and fees and expenses incurred in connection with any
appeals), judgments (including punitive and exemplary damages), penalties, fines
and amounts paid in settlement (if such settlement is approved in advance by the
Company, which approval shall not be unreasonably withheld) actually and
reasonably incurred by the indemnified parties in connection with any
threatened, pending or completed action or proceeding (including actions brought
on the Company’s behalf, such as shareholder derivative actions), whether civil,
criminal, administrative or investigative, to which he is or was a party, a
witness or other participant (or is threatened to be made a party, a witness or
other participant) by reason of the fact that he is or was a director, officer,
employee or agent of the Company or any of its subsidiaries. The indemnification
covers any action or inaction on the part of the indemnified party while he was
an officer or director or by reason of the fact that he is or was serving at the
Company’s request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. In the event
of any change, after the date of the Indemnification Agreements, in any
applicable law, statute or rule which expands the right of a California
corporation to indemnify a member of its board of directors or an officer, such
changes shall be within the purview of the indemnified parties’ rights and the
Company’s obligations under the Indemnification Agreements.
The
Indemnification Agreements are effective as of the date they were signed and may
apply to acts or omissions of the indemnified parties which occurred prior to
such date if the indemnified party was an officer, director, employee or other
agent of the Company, or was serving at the Company’s request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, at the time such act or omission occurred. All
obligations under the Indemnification Agreements will continue as long as an
indemnified party is subject to any actual or possible matter which is the
subject of the Indemnification Agreement, notwithstanding an indemnified party’s
termination of service as an officer or director.
F-45
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
12 – SUBSEQUENT EVENTS
Subsequent
to December 31, 2008, the Company appointed Kevin R. Harris, age 40, as its new
Chief Financial Officer and member of the Board of Directors. The
Company and Mr. Harris also agreed in principle to enter into a 2-year
employment agreement and Indemnification Agreement whereby the Company will pay
Mr. Harris an annual salary of $190,000 plus a car allowance of $750 per month
and grant to Mr. Harris additional 10-year options to purchase 200,000 shares of
common stock at an exercise price of $1.00 per share, vesting as follows: 25,000
of the option shares will vest upon grant; 25,000 of the option shares will vest
three months after the grant date; and the balance of 150,000 option shares will
vest in equal monthly increments over the term of the agreement.
On
January 1, 2009, the Company entered into a consulting agreement with Unionway
International, LLC an entity controlled by Mr. Bing Liu, for consulting
services. The agreement has a term of three months. The agreement
provides compensation of $9,000 for January 2009 and $4,500 per month for each
of February and March 2009. In addition, Mr. Liu has been granted
10-year options to purchase a total of 18,000 shares of common stock at an
exercise price of $1.00 per share vesting over the term of the
agreement. During the term of the agreement, Mr. Liu was paid a
one-time bonus of $18,000 related to 2008 achievements.
On
January 17, 2009, the Company entered into a consulting agreement with Michael
Barrett for consulting services relating to financial management and
reporting. The agreement had a term of two months and contemplated
that Mr. Barrett would provide the Company with approximately 10 hours of
services per week. The Company will compensate Mr. Barrett at the
rate of $110 per hour and has granted an option to purchase 2,500 shares of
common stock at an exercise price of $1.25 per share and a warrant to purchase
2,500 shares of common stock with a term of five years at an exercise price of
$1.25 per share, per month for the term of the agreement. The Options
are to expire one year from the termination of the agreement.
On
January 30, 2009, the Company entered into a one year lease with its current
landlord for approximately 2,395 rentable square feet of additional office
space. The Company is negotiating to occupy approximately 16,000
square feet in the building to accommodate growth and the landlord has agreed to
abate the rent of this additional office space while the parties are in active
negotiations about this possible expansion.
In
January and February 2009, the Company granted to employees, options to purchase
a total of 18,500 shares of common stock under the 2006 Plan and the 2005 Plan
at a price of $1.25 per share.
In
January 2009, the Company completed the sale and issuance of
the Company’s 10% Convertible Promissory Notes as described in
footnote 7 above. Accordingly, the Company received additional gross
proceeds of $355,000 and
issued warrants to purchase 142,000 shares of common stock with a term of five
years at an exercise price of $1.25 per share pursuant to the Offering,
and paid its placement agent a total of $21,300 in commissions and issued to its
placement agent a five-year warrant to purchase an additional 21,300 shares of
the Company’s common stock, at an exercise price of $1.25 per
share.
In
January 2009, certain holders of the 10% Secured Convertible Debentures
converted $50,000 of principal into 50,000 shares of common stock at $1.00 per
share.
In
February 2009, certain holders of the 10% Secured Convertible Debentures
converted $601,439 of principal into 601,439 shares of common stock at $1.00 per
share. In addition, those same holders converted $207,473 of
principal amount and accrued interest of certain other debentures received in
2008 into 244,086 shares of common stock at $0.85 per share.
In
February 2009, the Company issued 94,628 shares of restricted common stock
valued at $1.10 per share to a vendor as settlement for past services
rendered.
In March
2009, certain holders of the 10% Secured Convertible Debentures converted
$854,163 of principal into 854,163 shares of common stock at $1.00 per
share.
On March
24, 2009, the Company entered into a Media and Marketing Services Agreement with
GR Match, LLC (“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 is to continue until August 31, 2010, subject to certain rights of
termination, GRM will be the exclusive provider of all media purchasing and
direct response production services. On August 22, 2009, assuming
that the agreement has not been terminated, the Company will appoint a
representative of GRM 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.
The
Company is to provide a monthly budget to GRM for media placement. GRM will
purchase the media and invoice the Company 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, the Company has agreed
to grant to GRM a security interest and lien in any proceeds held in a merchant
services account the Company will establish with Lidle 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 the Company will establish that will be exclusively used to receive and
process orders of the Company’s products from customers who respond to the media
campaign (“direct response websites”).
F-46
CYBERDEFENDER
CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE
12 – SUBSEQUENT EVENTS (continued)
As
compensation for GRM’s services, the Company has agreed to issue a warrant for
the purchase of 1,000,000 shares of the Company’s common stock. The
term of the warrant will be 5 years and the exercise price will be $1.25 per
share. This warrant will have both cash and cashless exercise
provisions. This warrant will replace a warrant issued to GRM in
November 2008. The Company will also issue to GRM a second 5 year
warrant which will also be for the purchase of 1,000,000 shares of the Company’s
common stock at a price of $1.25 per share. This warrant may be
exercised only for cash. Finally, the Company has agreed to issue to
GRM a 5 year warrant for the purchase of 8,000,000 shares of the Company’s
common stock at an exercise price of $1.25 per share. This warrant
may be exercised only with cash. This warrant will be subject to
vesting as follows: for each $2 of media placement costs advanced by
GRM on the Company’s behalf, the right to purchase one share of the Company’s
common stock will vest. If GRM terminates the agreement due to a
breach by the Company in the Company’s performance or as a result of the
Company’s discontinuance, dissolution, liquidation, winding up or insolvency, or
if the Company terminates the agreement for any reason, any unexpired and
unvested rights of GRM to purchase shares of the Company’s common stock pursuant
to the agreement will immediately vest.
If the
average closing price of the Company’s common stock as reported by Bloomberg LP
for the 20 trading days preceeding January 1, 2010 is not at least $3.00 per
share or if the Company’s common stock is not publicly traded on any stock
exchange or over-the-counter market as of December 31, 2009, then the Company
shall 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 the Company as a result
of renewals and/or re-orders of the Company’s products by the Company’s
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 agreement or
(B) the date following January 1, 2010 when the average closing price of the
Company’s 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 the Company’s products from any direct response websites. The
Company’s obligation to pay these royalties will survive the expiration of
termination of the agreement.
The
agreement may be terminated by either the Company 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 the
Company 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 the
Company breaches its payment obligations under the agreement and fails 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 the Company breaches its
payment obligation more than 3 times, the Company 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
the Company’s breach, its discontinuance, dissolution, liquidation, winding up
or insolvency or because the Company’s average media placement costs for any 3
consecutive months during the term are less than $250,000, or if the Company
terminates the agreement upon notice, then, if the Company proposes to procure
media purchasing services from a third party which are similar to the services
provided by GRM under the agreement, the Company 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.
F-47