Attached files
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EX-32 - CYBERDEFENDER CORP | v206017_ex32.htm |
EX-31.2 - CYBERDEFENDER CORP | v206017_ex31-2.htm |
EX-31.1 - CYBERDEFENDER CORP | v206017_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q/A
(Amendment
No. 1)
Mark
One
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended March 31, 2010; or
|
¨
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from ________________ to ________
___________.
|
Commission
File No. 333-138430
CYBERDEFENDER CORPORATION
|
(Exact
name of registrant as specified in its
charter)
|
California
|
65-1205833
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
617 West 7th Street, 10th Floor, Los Angeles, California
90017
|
(Address
of principal executive offices)
|
(213) 689-8631
|
(Registrant’s
telephone number, including area
code)
|
(Former
name, former address and former fiscal year if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes ¨No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). ¨ Yes ¨ No (The registrant is
not yet subject to this requirement.)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
|
|
Non-accelerated
filer
|
¨
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ Yes x No
As of May
13, 2010, 25,845,375 shares of the registrant’s common stock, no par value, were
outstanding.
CYBERDEFENDER
CORPORATION
FORM
10-Q/A
March 31,
2010
TABLE OF
CONTENTS
|
Page
Number
|
|
PART
I - FINANCIAL INFORMATION
|
||
Item
1. Financial Statements (Unaudited)
|
||
Condensed
Balance Sheets - March 31, 2010 and December 31, 2009
|
2
|
|
Condensed
Statements of Operations - For the Three Months Ended March 31, 2010 and
2009
|
3
|
|
Condensed
Statements of Cash Flows - For the Three Months Ended March 31, 2010 and
2009
|
4
|
|
Notes
to Condensed Financial Statements
|
6
|
|
Forward-Looking
Statements
|
27
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
28
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
36
|
|
Item
4T. Controls and Procedures
|
36
|
|
PART
II - OTHER INFORMATION
|
||
Item
1. Legal Proceedings
|
38
|
|
Item
1A. Risk Factors
|
38
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
38
|
|
Item
3. Defaults Upon Senior Securities
|
38
|
|
Item
4. Removed and Reserved
|
38
|
|
Item
5. Other Information
|
38
|
|
Item
6. Exhibits
|
39
|
|
Signatures
|
40
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EXPLANATORY NOTE
This
Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2010 contains restated financial statements correcting an error
in the financial statements contained in the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2010 as originally filed with the
Securities and Exchange Commission (“SEC”) on August 9, 2010. Please see
Note 9 to the Condensed Financial Statements for a description of the accounting
error which led to the restatement. As a result of this restatement, we
are also amending disclosures which appear in Part I, Item 1, Notes to the
Condensed Financial Statements and Item 4T. Controls and Procedures. This
amended Form 10-Q also contains currently dated certifications pursuant to
Section 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2,
32.1 and 32.2.
Except as
described above, no other information in the original filing has been updated
and this Amendment continues to speak as of the date of the original
filing. Other events occurring after the information in the original
filing or other disclosures necessary to reflect subsequent events have been or
will be addressed in other reports filed with or furnished to the SEC subsequent
to the date of the original filing. Accordingly, this Form 10-Q/A should
be read in conjunction with such reports.
1
Part
I - FINANCIAL INFORMATION
Item
1. Financial Statements (Unaudited)
CYBERDEFENDER
CORPORATION
CONDENSED
BALANCE SHEETS
(UNAUDITED)
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Restated)
|
(Restated)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 6,922,888 | $ | 3,357,510 | ||||
Restricted
cash
|
1,918,606 | 1,565,841 | ||||||
Accounts
receivable, net of allowance
|
617,843 | 489,464 | ||||||
Deferred
financing costs, current
|
217,075 | 191,566 | ||||||
Prepaid
expenses
|
281,027 | 302,291 | ||||||
Deferred
charges, current
|
3,342,608 | 3,316,535 | ||||||
Total
Current Assets
|
13,300,047 | 9,223,207 | ||||||
|
||||||||
PROPERTY
AND EQUIPMENT, net
|
753,251 | 242,927 | ||||||
DEFERRED
FINANCING COSTS, net of current portion
|
25,509 | 47,892 | ||||||
DEFERRED
CHARGES, net of current portion
|
627,058 | 609,904 | ||||||
OTHER
ASSETS
|
109,903 | 67,605 | ||||||
Total
Assets
|
$ | 14,815,768 | $ | 10,191,535 | ||||
LIABILITIES AND STOCKHOLDERS’
DEFICIT
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 5,697,170 | $ | 4,893,186 | ||||
Accrued
expenses
|
498,598 | 862,023 | ||||||
Deferred
revenue, current
|
10,285,308 | 9,662,030 | ||||||
Capital
lease obligations, current
|
56,886 | 9,410 | ||||||
Total
Current Liabilities
|
16,537,962 | 15,426,649 | ||||||
DEFERRED
RENT
|
147,835 | 65,938 | ||||||
DEFERRED
REVENUE, less current portion
|
1,334,452 | 1,117,116 | ||||||
NOTES
PAYABLE, net of discount
|
5,808,629 | 1,593,000 | ||||||
CAPITAL
LEASE OBLIGATIONS, less current portion
|
129,047 | 9,708 | ||||||
Total
Liabilities
|
23,957,925 | 18,212,411 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
DEFICIT:
|
||||||||
Common stock, no par value;
50,000,000 shares authorized; 25,829,675 and 25,673,967 shares issued and outstanding at
March 31, 2010 and December 31, 2009, respectively
|
25,830 | 25,674 | ||||||
Additional
paid-in capital
|
44,088,708 | 36,884,000 | ||||||
Accumulated
deficit
|
(53,256,695 | ) | (44,930,550 | ) | ||||
Total
Stockholders’ Deficit
|
(9,142,157 | ) | (8,020,876 | ) | ||||
Total
Liabilities and Stockholders’ Deficit
|
$ | 14,815,768 | $ | 10,191,535 |
See
accompanying notes to condensed financial statements
2
CYBERDEFENDER
CORPORATION
CONDENSED
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
|
||||||||
March
31,
|
March
31,
|
|||||||
2010
|
2009
|
|||||||
(Restated)
|
(Restated)
|
|||||||
REVENUES:
|
|
|
||||||
Net
sales
|
$ | 9,477,330 | $ | 3,191,630 | ||||
COST
OF SALES
|
3,155,050 | 679,704 | ||||||
GROSS
PROFIT
|
6,322,280 | 2,511,926 | ||||||
OPERATING
EXPENSES:
|
||||||||
Media
and marketing services
|
10,229,931 | 4,499,734 | ||||||
Product
development
|
752,127 | 299,737 | ||||||
Selling,
general and administrative
|
2,877,213 | 1,251,557 | ||||||
Investor
relations and other related consulting
|
549,543 | 395,285 | ||||||
Depreciation
and amortization
|
20,242 | 10,336 | ||||||
Total
Operating Expenses
|
14,429,056 | 6,456,649 | ||||||
LOSS
FROM OPERATIONS
|
(8,106,776 | ) | (3,944,723 | ) | ||||
OTHER
INCOME/(EXPENSE):
|
||||||||
Change
in the value of derivative liabilities
|
- | 109,058 | ||||||
Interest
expense, net
|
(219,169 | ) | (876,894 | ) | ||||
Total
Other Expense, net
|
(219,169 | ) | (767,836 | ) | ||||
LOSS
BEFORE INCOME TAX EXPENSE
|
(8,325,945 | ) | (4,712,559 | ) | ||||
INCOME
TAX EXPENSE
|
200 | 200 | ||||||
NET
LOSS
|
$ | (8,326,145 | ) | $ | (4,712,759 | ) | ||
Basic
and fully diluted net loss per share
|
$ | (0.32 | ) | $ | (0.26 | ) | ||
Weighted
Average Shares Outstanding:
|
||||||||
Basic
and fully diluted
|
25,758,260 | 17,990,516 |
See
accompanying notes to condensed financial statements
3
CYBERDEFENDER
CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
|
||||||||
March 31,
2010
|
March 31,
2009
|
|||||||
(Restated)
|
(Restated)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (8,326,145 | ) | $ | (4,712,759 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Amortization
of debt discount
|
124,200 | 563,215 | ||||||
Provision
for doubtful accounts receivables
|
143,805 | - | ||||||
Change
in fair value of derivative liabilities
|
- | (109,058 | ) | |||||
Depreciation
and amortization
|
20,242 | 10,336 | ||||||
Compensation
expense from vested stock options
|
91,361 | 85,208 | ||||||
Amortization
of deferred financing costs
|
47,892 | 236,718 | ||||||
Warrants
issued for media and marketing services
|
5,489,789 | 754,985 | ||||||
Shares
and warrants issued for services
|
549,543 | 499,376 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Restricted
cash
|
(352,765 | ) | - | |||||
Accounts
receivable
|
(272,184 | ) | 55,081 | |||||
Prepaid
expenses
|
21,264 | 92,481 | ||||||
Deferred
charges
|
(43,227 | ) | (819,688 | ) | ||||
Other
assets
|
(42,298 | ) | (6,088 | ) | ||||
Accounts
payable and accrued expenses
|
522,456 | 242,428 | ||||||
Deferred
revenue
|
840,614 | 2,134,245 | ||||||
Cash
Flows Used In Operating Activities:
|
(1,185,453 | ) | (973,520 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property and equipment
|
(358,725 | ) | (6,567 | ) | ||||
Cash
Flows Used In Investing Activities
|
(358,725 | ) | (6,567 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from convertible notes payable and notes payable, net of
costs
|
4,948,982 | 333,700 | ||||||
Principal
payments on capital lease obligations
|
(5,026 | ) | (6,414 | ) | ||||
Proceeds
from exercise of stock options
|
33,925 | - | ||||||
Proceeds
from exercise of stock warrants, net of placement fees
|
131,675 | - | ||||||
Cash
Flows Provided by Financing Activities
|
5,109,556 | 327,286 | ||||||
NET
INCREASE/(DECREASE) IN CASH
|
3,565,378 | (652,801 | ) | |||||
CASH,
beginning of period
|
3,357,510 | 779,071 | ||||||
CASH,
end of period
|
$ | 6,922,888 | $ | 126,270 |
See
accompanying notes to condensed financial statements
4
CYBERDEFENDER
CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
|
||||||||
March 31,
2010
|
March 31,
2009
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 121,501 | $ | 2,132 | ||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
Discount
on note payable
|
$ | 908,571 | $ | 158,887 | ||||
Property
and equipment acquired through capital lease obligations
|
$ | 228,172 | $ | - | ||||
Warrants
issued in connection with sale of stock
|
$ | - | $ | 18,197 | ||||
Conversion
of notes payable to common stock
|
$ | - | $ | 1,739,943 | ||||
Cumulative
effect of accounting change to additional paid-in capital for
derivative liabilities
|
$ | - | $ | 7,065,940 | ||||
Cumulative
effect of accounting change to retained earnings for derivative
liabilities
|
$ | - | $ | 723,930 | ||||
Value
of warrants and embedded conversion features recorded to derivative
liabilities
|
$ | - | $ | 906,805 |
See
accompanying notes to condensed financial statements
5
CYBERDEFENDER
CORPORATION
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, 2009 included in the Company’s Annual Report on Form
10-K. The results for the three-month interim period ended March 31, 2010
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2010.
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 security software
and services to the consumer and small business market. The Company develops,
markets and licenses security software and related services. The Company’s goal
is to be a leading provider of advanced solutions to protect consumers and small
businesses against threats such as identity theft, Internet viruses and spyware
and to provide remote technical resolution services to those who use our
products.
The
Company sells a suite of products and services that includes anti-malware
software, a registry cleaner, technical support and identity protection
services. The Company markets its products directly to consumers through
multiple channels including internet, radio, television and retail.
The
Company developed a collaborative Internet security network, which we refer to
as 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. 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.
During
May 2010, the Company entered into an Agreement and Plan of Merger with a wholly
owned Delaware subsidiary, pursuant to which the Company merged with and into
the Delaware subsidiary, with the Delaware subsidiary being the surviving
corporation, on the basis of one share of common stock of the Delaware
subsidiary to be exchanged for each outstanding share of common stock of the
Company, all as more particularly set forth in the Agreement and Plan of Merger.
The main purpose of the merger was to change the Company’s state of
incorporation from California to Delaware. Additionally, at the time of the
merger the Company increased the number of authorized shares of common stock to
100 million, changed the common stock from no par value to $0.001 par value and
authorized 10 million shares of preferred stock. As a result the Company
retroactively restated its financial statements as if the change in par value
was effective for all periods presented.
Liquidity
The
Company has experienced operating losses since inception. Management has
implemented plans to continue to build its revenue base, expand sales and
marketing and improve operations, however, through September 2010, the Company
continued to operate at negative cash flow. For the three months ended
March 31, 2010 and the year ended December 31, 2009, the Company has incurred a
net loss of $8.3 million and $19.8 million with negative cash flows from
operations of $1.2 million and $6.0 million, respectively. As of March 31,
2010 and December 31, 2009, the Company had stockholders’ deficit of $9.1
million and $8.0 million, respectively. To date, the Company’s operations
have been primarily financed through debt and equity proceeds from private
placement offerings. Management believes that it has sufficient working
capital from recent financings to fund operations through at least March
31, 2011. As discussed in Note 9, the Company entered into a Revolving
Credit Loan Agreement with GRM effective as of December 3, 2010. The credit
facility permits the Company to borrow up to $5 million, and the initial
principal amount includes $4,287,660 of outstanding trade payables owed by the
Company to GRM on December 3, 2010 pursuant to a certain Media and Marketing
Services Agreement described in Note 5 below. All outstanding principal
and accrued but unpaid interest is due and payable in full at the earlier of
either March 31, 2011 or the closing of the Company’s sale and issuance of any
debt or equity securities of the Company in an aggregate amount exceeding $10
million. The Company intends to obtain additional financing prior to March 31,
2011 to satisfy the obligation. However, there can be no assurance that
the Company will secure the additional financing on terms acceptable to the
Company, or at all. In the event the Company is unable to obtain additional
financing, the Company expects it would be able to renegotiate the terms of the
GRM revolving credit facility, however, there is no assurance that this would
occur. Failure to obtain additional financing or an amendment to the GRM
revolving credit facility may require the Company to significantly curtail its
operations which
could have a material adverse impact on the Company’s results of operations and
financial position.
6
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, collectability of accounts receivable, recoverability of prepaid
expenses, deferred charges and property and equipment, value of shares and
options/warrants granted, valuation of deferred tax assets and recognition of
revenue. Actual results could differ from those estimates and
assumptions.
Accounts
Receivable
During
2010, the Company began offering a payment plan to its customers for the
purchase of multi-year technical support service plans. The payment plan allows
customers to pay in three installments over sixty days.
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. Amortization of leasehold improvements is provided over the shorter of
the estimated useful lives of the improvements or the term of the
lease.
Equipment under Capital
Lease
The
Company leases certain of its 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.
Revenue
Recognition
Revenue recognition.
The Company sells products, services and packages that include
both.
The
Company recognizes revenue from the sale of software licenses under the guidance
of the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 985, “Software.”
Specifically,
the Company recognizes revenues from its software 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.
|
As part
of the sales price of some of its software licenses, 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. Certain of the
Company’s software licenses are in substance a subscription and therefore the
sale is deferred and recognized ratably over the term of the arrangement.
Revenue is recognized immediately for the sale of products that do not require
product updates.
The
Company recognizes revenue from the sale of its technical support services under
the guidance of the FASB ASC Topic 605-20, “Revenue Recognition –
Services.” Revenue is recognized immediately for our one-time technical
support service as it is performed when purchased. The Company recognizes a
portion of the sale of one of its annual services at the time of purchase when
all of the elements necessary for revenue recognition have occurred and the
remaining revenue is deferred over the annual term. Revenue is deferred
and recognized over the term of the service agreements for the technical support
services that are provided by third parties.
7
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
Company recognizes revenue on the sale of bundled products based on the
individual components included in the bundle. Revenue is recognized on the
individual components as detailed above.
The
Company also uses third parties to sell its software and therefore evaluates the
criteria of FASB ASC Topic 605, “Revenue Recognition,” 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 MyIdentityDefender Toolbar free to the subscriber and still
supports CyberDefender FREE 2.0, which was free to subscribers. Revenues are
earned from advertising networks which pay the Company to display advertisements
inside the software or through the toolbar search. 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 CyberDefenderULTIMATE product. The costs associated with this service
are deferred and amortized against the recognition of the related sales
revenue.
Advertising
Costs
The
Company expenses advertising costs as incurred. As described in detail in Note 4
below, the Company issued warrants for media and marketing services. The
non-cash value of those warrants is included in media and marketing services on
the accompanying statements of operations. For the three months ended
March 31, 2010 and 2009, the Company recorded non-cash expense of $5.5 million
and $0.8 million, respectively.
Reserve for
Refunds
The
Company’s policy with respect to refunds is to offer refunds within the first 30
days after the date of purchase. The Company may voluntarily issue refunds to
customers after 30 days of purchase, however the majority are issued within 30
days of the original sale and are charged against the associated sale or
deferred revenues (as applicable). Refunds were $1.1 million and $0.6
million for the three months ended March 31, 2010 and 2009, respectively. As of
March 31, 2010 and December 31, 2009, the Company had $0 accrued for customer
refunds, based on historical timing of refunds.
Certain Risks and
Concentrations
As of
March 31, 2010, all of our cash was 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 by the Federal Deposit
Insurance Corporation (“FDIC”) which provides deposit coverage with limits up to
$250,000 per owner through December 31, 2013. As of March 31, 2010, the Company
had a balance of approximately $6.8 million in excess of the FDIC
limit.
Income
Taxes
The
Company has adopted the liability method of accounting for income taxes pursuant
to FASB ASC Topic 740, “Income
Taxes.” 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.
8
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
FASB ASC
Topic 740 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. An entity may only recognize or continue to
recognize tax positions that meet a “more likely than not”
threshold.
The
Company does not have any unrecognized tax benefits as of March 31, 2010 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 March
31, 2010.
Software Development
Costs
The
Company accounts for software development costs in accordance with FASB ASC
Topic 985, “Software.”
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.
Derivative
Instruments
Effective
January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815,
“Derivatives and
Hedging,” that
applies to any freestanding financial instruments or embedded features that have
the characteristics of a derivative and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result, 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 months ended March 31, 2009, the Company issued 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
months ended March 31, 2009 was 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 months ended March 31, 2009
was $906,805. We recognized income of $109,058 from the change in fair
value of the outstanding warrants and embedded conversion feature for the three
months ended March 31, 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
resulting in the elimination of the derivative liabilities of $7,139,757 and a
corresponding increase in additional paid-in capital.
9
CYBERDEFENDER CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value
Measurements
FASB ASC
Topic 820, “Fair Value
Measurements and Disclosures,” defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. 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 either a recurring or non-recurring basis.
All of
our financial instruments are recorded at fair value. For certain of the
Company’s financial instruments, including cash, restricted cash, accounts
receivable, accounts payable, other accrued liabilities and notes payable, the
carrying amounts approximate fair value due to their short
maturities.
Loss Per
Share
In
accordance with FASB ASC Topic 260, “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 March 31, 2010 and 2009, there were 17,627,439 and 15,329,433 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 FASB ASC Topic 718, “Compensation – Stock Compensation,”
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. For non-employee stock based compensation, the Company
recognizes an expense in accordance with FASB ASC Topic 505, “Equity,” 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 FASB ASC
Topic 505, “Equity.”
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. An asset acquired in exchange for the issuance of
fully vested, non-forfeitable equity instruments should not be presented or
classified for accounting purposes as an offset to equity on the grantor’s
balance sheet once the equity instrument is granted. 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.
10
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Segment
Disclosures
The
Company operates in one segment and its chief operating decision maker is its
chief executive officer.
Subsequent
Events
The
Company has evaluated subsequent events through the filing date of this Form
10-Q, and determined that no subsequent events have occurred that would require
recognition in the condensed financial statements or disclosure in the notes
thereto other than as discussed in the accompanying notes (see Note
8).
Recently Issued Accounting
Pronouncements
The
Company has adopted all accounting pronouncements effective before March 31,
2010 which are applicable to the Company.
In
September 2009, the FASB issued an update to its accounting guidance
regarding multiple-deliverable revenue arrangements. The guidance addresses how
to measure and allocate consideration to one or more units of accounting.
Specifically, the guidance requires that consideration be allocated among
multiple deliverables based on relative selling prices. The guidance establishes
a selling price hierarchy of (1) vendor-specific objective evidence, (2)
third-party evidence and (3) estimated selling price. This guidance is effective
for annual periods beginning on or after June 15, 2010 but may be early adopted
as of the beginning of an annual period. The Company expects to adopt this
guidance on January 1, 2011 and does not expect this guidance to have a material
impact on its financial statements.
In
October 2009, the FASB issued an update to its accounting guidance
regarding software revenue recognition. The guidance changes the accounting
model for revenue arrangements that include both tangible products and software
elements. Under this guidance, tangible products containing software components
and non-software components that function together to deliver the tangible
product’s essential functionality are excluded from the software revenue
guidance in FASB ASC Topic 985, “Software.” In addition,
hardware components of a tangible product containing software components are
always excluded from the software revenue guidance. This guidance is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 but may be early adopted. The
Company expects to adopt this guidance on January 1, 2011 and does not expect
this guidance to have a material impact on its financial
statements.
In
January 2010, the FASB issued an update to its accounting guidance regarding
fair value measurement and disclosure. The guidance affects the disclosures made
about recurring and non-recurring fair value measurements. This guidance is
effective for annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010. Early
adoption is permitted. The Company is currently evaluating the impact that this
guidance will have on its financial statements.
In
February 2010, the FASB issued amended guidance on subsequent events. Under
this amended guidance, SEC filers are no longer required to disclose the date
through which subsequent events have been evaluated in originally issued and
revised financial statements. This guidance was effective immediately and we
adopted this new guidance in the quarter ended March 31, 2010. See Note 8 —
Subsequent Events to our condensed financial statements.
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 March
31, 2010 and December 31, 2009 was $10,000. Under a separate credit card
processing agreement with a different financial institution, the Company is also
required to maintain a security reserve deposit as collateral. The amount of the
deposit is currently based on 10% of the six-month rolling sales volume and was
approximately $1.7 million and $1.3 million as of March 31, 2010 and December
31, 2009, respectively. The security reserve deposit is funded by the
institution withholding a portion of daily cash receipts from Visa and
MasterCard transactions.
On
September 30, 2009, the Company entered into a second amendment to its lease as
more fully described in Note 6 below. As part of the amendment the Company was
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.
11
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT
Common
Stock
During
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.
See
“stock warrants” below for additional shares issued related to the exercise of
stock warrants.
See
“stock options” below for additional shares issued related to the exercise of
stock options.
See Note
5 for additional shares issued related to the convertible notes
payable.
Stock
warrants
During
August 2008, the Company closed 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 purchase price was $25,000
per unit. 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).
On
November 11, 2008, the Company 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 warrants 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. 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. 540,000
warrants, valued at $391,532 using the Black Scholes pricing model, vested
during the three months ended March 31, 2009 and were expensed to investor
relations and other consulting expense.
On
January 17, 2009, the Company entered into a two-month consulting agreement with
a consultant for services relating to financial management and reporting.
As part of the agreement, the consultant 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
to investor relations and other consulting expense.
On
October 30, 2008, the Company executed a letter of intent with GRM to create,
market and distribute direct response advertisements to sell the Company’s
products. Pursuant to the letter of intent, GRM was 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
to prepaid expenses at the time of issuance and was expensed over the five-month
term of service. The Company expensed $570,897 to media and marketing services
expense for the three months ended March 31, 2009. The warrant included an
anti-dilutive provision that reduced the exercise price of the warrant if the
Company at any time while this warrant is outstanding sells and issues any
common stock at a price per share less than the then exercise price. During
August 2009, the Company received a waiver whereby GRM permanently waived, as of
and after April 1, 2009, any and all exercise price adjustments that would
otherwise occur, or would have occurred on or after April 1, 2009, as a result
of this provision.
12
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT (Continued)
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 June 1, 2011, as amended, 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, per the agreement, the Company
appointed a representative of GRM to the Company’s board of directors. A
GRM representative 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 five-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 was expensed over the five-month
expected term of service. During the three months ended March 31, 2009, $142,461
was expensed to media and marketing services expense. This warrant may be
exercised only for cash. Finally, the Company agreed to issue to GRM a
five-year warrant (“Media Services Warrant”) for the purchase of 8,000,000
shares of the Company’s common stock at an exercise price of $1.25 per
share. The Media Services Warrant may be exercised only with cash and is
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 March 31, 2010, the right to purchase
3,383,470 of the 8,000,000 Media Services Warrant shares has vested and was
valued at $10,120,996 using the Black-Scholes pricing model. During the
three months ended March 31, 2010 and 2009, 1,546,138 and 50,000 warrants
vested, and $5,489,789 and $42,682 was expensed to media and marketing services
expense. The remaining 4,616,530 shares from the Media Services Warrant are not
guaranteed to vest as they are contingent upon GRM advancing media placement
costs, therefore, these unvested warrants have not been included or accounted
for as outstanding dilutive securities at March 31, 2010. These warrants
included an anti-dilutive provision that reduced the exercise price of the
warrants if the Company at any time while the warrants are outstanding sells and
issues any common stock at a price per share less than the then exercise price.
During August 2009, the Company received a waiver whereby GRM permanently
waived, as of and after April 1, 2009, any and all exercise price adjustments
that would otherwise occur, or would have occurred on or after April 1, 2009, as
a result of this provision.
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.
In
November 2009, the Company amended the Media and Marketing Services Agreement
with GRM. Pursuant to this amendment, if any of the warrants that have been
issued to GRM are outstanding and the Company sells and issues common stock at a
price per share less than the exercise price set forth in the applicable
warrant, as adjusted thereunder (such issuances collectively, a “Lower Priced
Issuance”), without the prior written consent of GRM, then 37.5% of any unexpired and
unvested rights of GRM to purchase shares of the Company’s common stock pursuant
to the Media Services Warrant shall immediately and automatically vest in full
without any notice or action of GRM. As of March 31, 2010, no common stock has
been issued at a price less than the exercise price of the GRM
warrants.
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. As of March
31, 2010, all of the warrant shares have vested. During the three months
ended March 31, 2010, $523,610 was expensed to investor relations and other
consulting expense.
On August
1, 2009, the Company entered into an agreement with a consultant for business
development services related to the signing of the Wiley licensing
contract. The consultant was granted a warrant to purchase 55,000 shares
of the Company’s common stock for a period of three years at an exercise price
of $2.18. The warrant was to vest 15,000 shares at the signing of the
Wiley contract, 15,000 shares at the Wiley launch and 25,000 shares at the
earlier of the first anniversary date of the agreement or when sales of the
Wiley branded products exceed 100,000 units. The second 15,000 warrant shares
vested during the three months ended March 31, 2010 and $25,933 was expensed to
investor relations and other consulting expense.
13
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
4 - STOCKHOLDERS’ DEFICIT (Continued)
See Note
5 for additional warrants issued during the three months ended March 31, 2009
related to the convertible notes payable.
The
following represents a summary of the warrants outstanding at March 31,
2010 and 2009 and changes during the three months then ended:
Three Months Ended
|
||||||||||||||||||||||||
March 31, 2010
|
March 31, 2009
|
|||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||
Number
|
Average
|
Aggregate
|
Number
|
Average
|
Aggregate
|
|||||||||||||||||||
of
|
Exercise
|
Intrinsic
|
Of
|
Exercise
|
Intrinsic
|
|||||||||||||||||||
Warrants
|
Price
|
Value
|
Warrants
|
Prices
|
Value
|
|||||||||||||||||||
Outstanding,
beginning of period
|
13,026,657 | $ | 1.20 | 11,029,890 | $ | 1.14 | ||||||||||||||||||
Issued
|
1,546,138 | $ | 1.25 | 1,218,300 | $ | 1.25 | ||||||||||||||||||
Exercised
|
(126,750 | ) | $ | 1.11 | - | - | ||||||||||||||||||
Outstanding,
end of period
|
14,446,045 | $ | 1.20 | $ | 41,829,743 | 12,248,190 | $ | 1.16 | $ | 1,158,715 | ||||||||||||||
Exercisable,
end of period
|
14,421,045 | $ | 1.20 | $ | 41,781,743 | 11,708,190 | $ | 1.15 | $ | 1,158,715 |
The
following table summarizes information about warrants outstanding at
March 31, 2010:
Weighted
|
||||||||
Average
|
||||||||
Number
of
|
Remaining
|
|||||||
Warrant
|
Contractual
|
|||||||
Exercise
Price
|
Shares
|
Life
(Years)
|
||||||
$ 1.00
|
2,704,840
|
1.61
|
||||||
$ 1.01
|
700,306
|
5.66
|
||||||
$ 1.20
|
324,875
|
2.76
|
||||||
$ 1.25
|
10,441,034
|
3.31
|
||||||
$ 1.80
|
2,500
|
4.07
|
||||||
$ 1.83
|
125,000
|
4.14
|
||||||
$ 2.05
|
77,490
|
4.48
|
||||||
$ 2.18
|
55,000
|
2.48
|
||||||
$ 2.25
|
15,000
|
4.39
|
||||||
14,446,045
|
The
weighted average grant date fair value of warrants granted during the three
months ended March 31, 2010 and 2009 was $3.55 and $0.74 per share,
respectively. As of March 31, 2010, 25,000 shares of common stock covered by a
warrant, with an estimated remaining value of $43,222, remain unvested and will
vest once a milestone has occurred per the underlying contract. The weighted
average remaining life of the vested warrants is 3.10 years.
14
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, of which
753,233 have been granted, 178,125 have been exercised and 376 are available to
grant at March 31, 2010.
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 Company amended the 2006
Plan in June 2009 to increase the maximum number of shares available to be
granted by 1,500,000 shares. The maximum aggregate amount of stock based awards
that may be granted from the 2006 Plan is 2,875,000, shares of which
1,356,166 have been granted, 302,449 have been exercised and 1,216,385 are
available to grant at March 31, 2010.
In
January 2009, the Company granted 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 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 his employment agreement. In addition, per the
terms of the employment agreement, on March 31, 2010 and 2009 the Company
granted an option to purchase 25,000 shares of common stock at an exercise price
of $1.00 per shares, vesting evenly over 24 months, as bonus
compensation.
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 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 as
compensation for 2008 achievements. In addition, Mr. Liu has been granted
10-year options to purchase 5,000 shares of common stock at an exercise price of
$1.00 per share vesting 2,500 on January 1, 2009, 1,250 on February 1, 2009 and
1,250 on March 1, 2009.
On
January 17, 2009, the Company entered into a two month consulting agreement with
a consultant for services relating to financial management and reporting.
As part of the agreement, the consultant was granted options 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.
During
the three months ended March 31, 2010 and 2009, the Company granted to employees
options to purchase a total of 94,813 and 38,000 shares of common stock,
respectively, at prices ranging from $1.25 to $4.27 per
share.
15
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:
Three
Months
|
||||||||||||||||||||||||||||||||
March
31, 2010
|
March
31, 2009
|
|||||||||||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||||||||||
Weighted
|
Average
|
Weighted
|
Average
|
|||||||||||||||||||||||||||||
Number
|
Average
|
Remaining
|
Aggregate
|
Number
|
Average
|
Remaining
|
Aggregate
|
|||||||||||||||||||||||||
Of
|
Exercise
|
Contractual
|
Intrinsic
|
of
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||||||||||||||
Options
|
Price
|
Term
|
Value
|
Options
|
Prices
|
Term
|
Value
|
|||||||||||||||||||||||||
Outstanding,
beginning of year
|
1,856,293 | $ | 1.09 | 1,444,084 | $ | 0.83 | ||||||||||||||||||||||||||
Granted
|
119,813 | $ | 2.96 | 291,000 | $ | 1.04 | ||||||||||||||||||||||||||
Exercised
|
(28,958 | ) | $ | 1.17 | - | $ | - | |||||||||||||||||||||||||
Forfeited
|
(37,749 | ) | $ | 1.85 | (30,083 | ) | $ | 1.22 | ||||||||||||||||||||||||
Outstanding,
end of year
|
1,909,399 | $ | 1.19 | 7.44 | $ | 5,555,241 | 1,705,001 | $ | 0.86 | 7.78 | $ | 680,045 | ||||||||||||||||||||
Vested,
exercisable and expected to vest in the future
|
1,719,162 | $ | 1.09 | 7.25 | $ | 5,182,381 | 1,582,494 | $ | 0.84 | 7.67 | $ | 660,661 | ||||||||||||||||||||
Exercisable,
end of year
|
1,206,171 | $ | 0.84 | 6.55 | $ | 3,932,303 | 1,139,016 | $ | 0.75 | 7.12 | $ | 572,525 |
The
weighted-average grant date fair value of options granted during the three
months ended March 31, 2010 and 2009 was $3.03 and $0.79 per option,
respectively.
As of
March 31, 2010 and 2009, 703,228 and 550,985 of the options granted are not
vested with an estimated remaining value of $892,165 and $364,408, respectively.
At March 31, 2010 and 2009, the remaining value of non vested options granted is
expected to be recognized over the weighted average vesting period of 2.43 and
2.55 years, respectively.
The
Company recorded compensation expense associated with the issuance and
vesting of stock options of $91,361 and $85,208 in selling, general and
administrative expense for the three months ended March 31, 2010 and 2009,
respectively.
During
the three months ended March 31, 2010 and 2009, 28,958 and 0 employee stock
options were exercised for total proceeds to the Company of $33,925 and $0,
respectively. The aggregate intrinsic value of the exercised options was
$90,532 and $0 for the three months ended March 31, 2010 and 2009,
respectively.
The
Company recognizes the fair value of options issued to employees and consultants
as stock-based compensation expense over the vesting period of the awards. The
estimated fair value of options is based on the Black-Scholes pricing
model.
16
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 2006
Debentures are convertible at $1.00 (the “Base Conversion Price”) into 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 were 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 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 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.
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.
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.
17
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
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 issued 195,594 shares during 2007 as partial payment for these
liquidated damages valued at $166,259. At March 31, 2010 and December 31, 2009,
$3,658 of these damages remained in accrued expenses on the accompanying
condensed balance sheets. The Company issued 190,090 shares in November and
December 2007 as a partial payment in the amount of $161,580 for the April 1
interest. The Company issued 15,669 shares in January and February 2008 as a
partial payment in the amount of $13,319 for the April 1 interest.
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 March 31, 2010 and December 31,
2009, $25,422 of these damages remained in accrued expenses on the accompanying
condensed balance sheets. The Company issued 94,952 shares in February 2008 as a
partial payment in the amount of $110,147 for the July 1 and October 1, 2007
interest payments.
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 September 2008, the Company issued
$64,422 in additional unsecured convertible 10% debentures (“2006 Unsecured
Debentures”) as payment of liquidated damages, which included $4,422 of penalty
interest, and $26,868 in 2006 Unsecured Debentures as payment for quarterly
interest due on January 1, 2008, which included $1,868 of penalty interest. The
2006 Unsecured 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 2006 Unsecured Debentures as payment of liquidated damages, quarterly
interest, and penalty interest. The Company issued 3,750 shares in
December 2008 as partial payment for these liquidated damages valued at $3,750.
The Company issued 5,567 shares in April 2009 as final payment for $4,732 in
liquidated damages.
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. 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. The Company issued 6,250 shares in December 2008 as partial
payment for $6,250 in interest. 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 $7,886 in
interest. In May 2009, the Company paid $56,575 for quarterly interest, which
included $3,810 of penalty interest. In September 2009, the Company paid
$47,614 for quarterly interest. At March 31, 2010 and December 31, 2009, $69,982
remained in accrued interest on the 2006 Debentures and is included in accrued
expenses on the accompanying condensed balance sheets.
18
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
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 FASB ASC Topic 470,
“Debt.” The value of the 2006
Debentures was allocated between the 2006 Debentures, the registration rights
arrangement and the warrants, including the discount, 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 discount, is
being amortized over the term of the 2006 Debentures. The Company amortized $0
and $398,391 to interest expense for the three months ended March 31, 2010 and
2009, respectively, including the acceleration of amortization due to
conversions discussed below.
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 $0 and $199,165 to interest expense, including the acceleration
of amortization due to conversions discussed below, related to the 2006
Debentures during the three months ended March 31, 2010 and 2009,
respectively.
During
the first quarter of 2009, certain holders of the 2006 Debentures converted
$1,505,602 of principal into 1,505,602 shares of common stock at $1.00 per
share. The unamortized discount and the unamortized debt issuance costs on
the converted notes were recorded as interest expense at the time of the
conversion.
During
the first quarter of 2009, certain holders of the 2006 Unsecured Debentures
converted $234,341 of principal into 275,695 shares of common stock at $0.85 per
share.
As of
December 31, 2009, all of the holders of the 2006 Debentures and 2006 Unsecured
Debentures had converted the outstanding principal amount to shares of common
stock and all of the related note discount and debt issuance costs have been
amortized to interest expense.
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 2006
Unsecured Debentures to September 12, 2009 and the Company agreed and
acknowledged that the 2006 warrant shares and the shares of common stock
underlying the 2006 Unsecured 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
and paid its placement agent a total of $50,700 in commissions and issued to its
placement agent a five-year warrant to purchase an additional 50,700 shares of
the Company’s common stock, at an exercise price of $1.25 per share, valued at
$47,498 using the Black-Scholes option pricing model. 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, valued at
$18,197 using the Black-Scholes option pricing model.
19
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 the Company’s 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 the Company’s 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 was 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 was required to 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 was delinquent in the filing deadline or the
effectiveness deadline of the registration statement, it would have been
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
would have been required to 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 discount, which amounted to $595,646 and
$604,354, respectively. The discount of $604,354 ($158,886 was recorded in the
first quarter of 2009) related to the warrants, including the discount, is being
amortized over the term of the 2008 Convertible Notes. The Company amortized $0
and $164,824 to interest expense related to the 2008 Convertible Notes for the
three months ended March 31, 2010 and 2009, respectively. At March 31, 2010 and
December 31, 2009, $0 and $109,001 of accrued interest on these notes is
included in accrued expenses on the accompanying condensed balance
sheets.
In
addition, as part of the transaction, the Company paid to the placement agent
$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 ($39,497 was recorded in 2009), are being amortized over the term of
the 2008 Convertible Notes. The Company recorded amortization of $0 and
$37,553 to interest expense during the three months ended March 31, 2010 and
2009, respectively.
On
September 30, 2009, all of the holders of the 2008 Convertible Notes converted
$1,200,000 of principal into 960,000 shares of common stock at $1.25 per share
and all of the related note discount and debt issuance costs have been amortized
to interest expense.
20
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
During
May 2009, the Company entered into a ninth 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 10% 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. Subsequent to the execution of the Consent and Waiver, in
May 2009, the Company entered into a Securities Purchase Agreement with certain
accredited investors to which it sold 2009 10% Convertible Notes in the
aggregate principal amount of $300,000, which may be converted into an aggregate
of 171,429 shares of common stock. In conjunction with the sale of the
2009 10% Convertible Notes, the Company paid its placement agent a total of
$12,000 in commissions, which was amortized in full during 2009.
The total
value of the 2009 10% Convertible Notes was allocated between the 2009 10%
Convertible Notes and the discount, which amounted to $19,715. The discount was
amortized over the term of the 2009 10% Convertible Notes. At March 31, 2010 and
December 31, 2009, $0 and $12,500 of accrued interest on these notes is included
in accrued expense on the accompanying condensed balance sheets.
On
September 30 2009, all of the holders of the 2009 10% Convertible Notes
converted $300,000 of principal into 171,429 shares of common stock at $1.75 per
share and all of the related note discount and debt issuance costs have been
amortized to interest expense.
On
November 4, 2009, the Company closed the sale and issuance of $2.2 million in
aggregate principal amount of its 8% Secured Convertible Promissory Notes (the
“2009 8% Convertible Notes”), convertible into common stock of the Company at a
conversion price of $2.05 per share. The Company has the right, up to and
including the trading day immediately prior to the payment due date, to force
the holders to convert all or part of the then outstanding principal amount of
the 2009 8% Convertible Notes, plus accrued but unpaid interest, into shares of
the Company’s common stock if the 10-day volume weighted average price
(sometimes referred to as “VWAP”) exceeds 250% of the conversion price. All
outstanding principal and interest of the 2009 8% Convertible Notes is due April
1, 2011. Out of the total gross proceeds of the offering, the Company paid
its placement agent $154,980 in commissions, equal to 7% of the gross proceeds
of the offering, and issued to its placement agent a three year warrant to
purchase 77,490 shares of common stock, equal to 3.5% of the number of shares of
common stock into which the 2009 8% Convertible Notes initially may be
converted, at an exercise price of $2.05 per share. The warrants were valued at
$132,369 using the Black-Scholes option pricing model. These costs, totaling
$287,349, are being amortized over the term of the 2009 8% Convertible Notes.
The Company recorded amortization of $47,892 to interest expense during the
three months ended March 31, 2010. In conjunction with the sale of the 2009 8%
Convertible Notes, the Company executed a Security Agreement pursuant to which
it granted to the note holders a first lien security interest, subject only to
certain Permitted Liens which are defined in the Security Agreement, in certain
collateral to secure payment of the 2009 8% Convertible Notes.
The total
value of the 2009 8% Convertible Notes was allocated between the 2009 8%
Convertible Notes and the discount, which amounted to $745,200. The discount is
being amortized over the term of the 2009 8% Convertible Notes. The Company
amortized $124,200 to interest expense related to the 2009 8% Convertible Notes
for the three months ended March 31, 2010. At March 31, 2010 and December 31,
2009, $76,999 and $32,719 of accrued interest on these notes is included in
accrued expenses on the accompanying condensed balance sheets.
On March
31, 2010, the Company sold and issued in a private placement to GRM a 9% Secured
Convertible Promissory Note in the aggregate principal amount of $5,300,000 (the
“GR Note”), due March 31, 2012. The Company received net proceeds of
$5,000,000 after payment of an issuance fee of $300,000 to GRM. The
Company has recorded the $300,000 as a discount to the GR Note as if the amount
were an original issue discount. The GR Note will accrue simple interest at the
rate of 9% per annum, payable on the first day of each calendar quarter in cash;
provided, however, that GRM may elect to cause the accrued unpaid interest for
any applicable quarter to be added to the then outstanding principal amount of
the GR Note in lieu of a cash payment of interest by delivering written notice
of such election to the Company no later than 15 days prior to the applicable
interest payment date. The Company may elect to make the first interest
payment due July 1, 2010 either in cash or by adding it to the aggregate
principal amount of the GR Note.
21
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 - CONVERTIBLE NOTES PAYABLE (Continued)
Commencing
180 days after March 31, 2010, the outstanding principal amount of the GR Note
and accrued unpaid interest due thereon may be converted, at GRM’s election,
into the Company’s common stock at a conversion price of $3.50 per share (the
“Conversion Price”), subject to adjustment only in the event of stock splits,
dividends, combinations, reclassifications and the like. If at any time
after 180 days from the later of March 31, 2010 or such date when a registration
statement filed with the SEC covering the resale of the shares issuable upon
conversion of the GR Note becomes effective, the volume weighted average price
of the Company’s common stock for each of any 30 consecutive trading days, which
period shall have commenced after the effective date of such registration
statement, exceeds 250% of the then applicable Conversion Price, and the daily
trading volume for the common stock is at least 100,000 shares (subject to
adjustment for stock splits, combinations, recapitalizations, dividends and the
like) during such 30 trading day period, then the Company may force GRM to
convert all or part of the then outstanding principal amount of the GR
Note. GRM has piggyback and demand registration rights with respect to the
shares issuable upon conversion of the GR Note.
The
Company has the right to prepay the GR Note at any time without penalty upon 30
days written notice to GRM. GRM’s right to convert the GR Note (commencing
180 days after its issuance date), remains active during the prepayment notice
period. Therefore, if the Company notifies GRM of its election to prepay
the GR Note sooner than 150 days from the issuance date of the GR Note, then GRM
would be obligated to accept repayment in cash.
The
Company granted GRM a first lien priority security interest in all of the
Company’s assets securing the Company’s obligations under the GR Note, subject
to certain permitted indebtedness and liens permitted in connection with the
same.
The
Company agreed that on or before 90 days following March 31, 2010, the Company
shall: (i) cause each holder (each, a “Senior Debt Holder”) of the Company’s
outstanding 2009 8% Convertible Notes, dated on or about November 5, 2009, in
the aggregate principal amount of $2,214,000, to (A) be entirely converted,
along with accrued unpaid interest thereon, into shares of the Company’s common
stock in accordance with the terms thereof; or (B) expressly subordinate any
lien which the Senior Debt Holder holds in the Company's assets to
the GR Note and the security interest granted to GRM pursuant to a written
subordination agreement with GRM acceptable to GRM in its sole discretion; or
(C) prepay the entire outstanding principal balance of each 2009 8% Convertible
Note, and any accrued unpaid interest thereon and cause each of the 2009 8%
Convertible Notes to be cancelled.
The total
value of the GR Note was allocated between the GR Note and the discount, which
amounted to $1,208,571 including the $300,000 issuance fee. The discount will be
amortized over the term of GR Note. The Company amortized $0 to interest expense
related to the GR Note for the three months ended March 31, 2010.
As part
of the transaction, the Company incurred costs of approximately $51,000. These
costs are being amortized over the term of the GR Note. The Company
recorded amortization of $0 to interest expense during the three months ended
March 31, 2010 and 2009, respectively.
Convertible
notes payable consist of the following:
March 31, 2010
|
December 31, 2009
|
|||||||
GR
Note
|
5,300,000 | - | ||||||
2009
8% Convertible Notes
|
2,214,000 | 2,214,000 | ||||||
Unamortized
discount
|
(1,705,371 | ) | (621,000 | ) | ||||
Convertible
notes payable, net
|
$ | 5,808,629 | $ | 1,593,000 |
NOTE
6 - COMMITMENTS AND CONTINGENCIES
Royalty
Agreement
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 paid
a $100,000 non-refundable royalty advance that is recorded in prepaid expenses
on the accompanying balance sheet. There was no royalty expense for the
three months ended March 31, 2010.
22
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
6 - COMMITMENTS AND CONTINGENCIES (Continued)
Operating
Leases
The
Company's primary offices are in Los Angeles, California. The Company
entered into a lease on October 19, 2007 which commenced on March 24, 2008 for
approximately 4,742 rentable square feet of office space with a term of
sixty-two months. On October 9, 2009, the Company entered into a second
amendment of its lease with its current landlord to relocate and to occupy
approximately 16,000 square feet in the building to accommodate growth. The
lease calls for a base monthly rent of $35,060 with annual increases of 3% plus
common area expenses with a term of ten years. The Company’s rent on its
original space was abated beginning July 1, 2009 and the abatement continues on
the new space for a period of fourteen (14) months from the date the Company
began to occupy the new space, which was February 1, 2010, as long as the
Company abides by all the terms and conditions of the lease and if no event of
default occurs. Rent expense (including any rent abatements or escalation
charges) is recognized on a straight-line basis from the date the Company takes
possession of the property to the end of the lease term. 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.
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
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 condensed balance sheet.
Beginning
on October 30, 2006 and at various times thereafter, the Company entered into
Indemnification Agreements with its directors and certain of its officers, 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. 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.
23
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - RELATED PARTY
TRANSACTIONS
Unionway
International, LLC, an entity controlled by Bing Liu, a former officer, provided
software development services to the Company. During the three months ended
March 31, 2010 and 2009, the Company paid Unionway International, LLC $0 and
$13,500, respectively.
The
Company purchased promotional items with the Company’s name and logo on them
from VK Productions, an entity controlled by Mr. Guseinov’s spouse. During the
three months ended March 31, 2010, VK Productions invoiced the Company
$6,173.
See Note
4 for a detailed description of all warrants issued to GRM and the vesting of
those warrants in connection with the Media Agreement.
GRM
invoiced the Company $77,307 and $2,500 for the three months ended March 31,
2010 and 2009 for their overhead expense reimbursement on media costs incurred
by GRM pursuant to the Media Agreement.
See Note
5 for a detailed description of the GR Note.
NOTE
8 - SUBSEQUENT EVENTS
On April
1, 2010, the Company and GRM entered into a License Agreement (the “License
Agreement”) whereby the Company granted to GRM an exclusive royalty-bearing
license to market, sell and distribute, in the United States through retail
channels of distribution (such as retail stores, online retail storefronts,
kiosks, counters and other similar retail channels) and television shopping
channels (such as QVC and Home Shopping Network), and in certain foreign
countries through retail channels, television shopping channels, direct response
television and radio, and Internet websites associated with such marketing
channels (other than www.cyberdefender.com),
the Company’s line of antivirus and Internet security products or services (the
“License”).
In
consideration of the License, GRM will pay royalties to the Company on a
product-by-product basis for each annual subscription and each annual renewal by
end users of the products covered by the License Agreement. Upon the
achievement of certain milestones or conditions in the License Agreement, GRM
will make annual advances of royalties to the Company in the amount of $250,000
per year. If GRM fails to pay an annual advance when due, and if certain
other conditions are met, the License shall become non-exclusive.
The
License Agreement provides that GRM and the Company will share costs associated
with localizing products and related material to comport to the language, laws
and/or customs of foreign countries, subject to certain caps on GRM’s expenses
with respect to such localization efforts. The Company will provide customer
service and all product and technical support services to end users of the
products in the United States and will retain all revenue from such
services. Additionally, with respect to each foreign country in which GRM
markets the products, the Company will have the right to provide customer
service and all product and technical support services to end users of the
products in such foreign country.
The
License Agreement also provides that, after certain conditions are met, the
Company has the right to buy back and terminate the License as it relates to the
territory of United States (the “Domestic Buy-Out Right”) and/or to the
collective territories outside of the United States (the “International Buy-Out
Right”). The price to be paid by the Company in connection with the
Domestic Buy-Out Right or International Buy-Out Right, as applicable, will be
based on a combination of factors, including (i) the annualized gross revenue
earned by GRM in connection with the sale and distribution of products in the
applicable territory being “bought out” by the Company (the “Annualized Gross
Revenue”), (ii) the enterprise value of the Company, (iii) the gross revenue of
the Company for the 12 months preceding its exercise of such buy-out right
and/or (iv) the fair market value of GRM’s rights under the License Agreement
(with respect to the territory being “bought out” by the Company).
In no case, however, will the buy-out price be less than (a) 1.5 times the
Annualized Gross Revenue, if the applicable buy-out right is exercised within
one year of such right becoming exercisable, or (b) 3.0 times the Annualized
Gross Revenue, if the applicable buy-out right is exercised at any time after
the one-year anniversary of such right becoming exercisable. The buy-out
price will be payable in cash or in shares of the Company’s common stock, or any
combination thereof, at GRM’s discretion.
The
License Agreement may be terminated by mutual consent of the parties. The
License Agreement may also be terminated by either party upon a default of the
other party under the License Agreement that remains uncured for 30 days
following notice of such default. Additionally, GRM may terminate the
License Agreement at any time for convenience, provided that GRM may not market
any antivirus or Internet security products or services that compete with the
Company’s products or services in the distribution channels covered by the
License Agreement for one year following such a termination for
convenience.
24
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 - SUBSEQUENT EVENTS (Continued)
On April
26, 2010 the Company entered into an Amended and Restated Key Executive
Employment Agreement with each of Gary Guseinov, the Company’s Chief Executive
Officer, Kevin Harris, the Company’s Chief Financial Officer, and Igor Barash,
the Company’s Chief Information Officer.
Amended and Restated Key
Executive Employment Agreement with Gary Guseinov (the “Guseinov
Agreement”)
The
Guseinov Agreement has a term of three years commencing as of January 1, 2010
and will renew for successive one-year periods if not terminated sooner in
accordance with its terms. The Company will pay Mr. Guseinov an annual
base salary of $281,250 plus certain reimbursable expenses. The
Company will review Mr. Guseinov’s base salary every six months and the Board
may in its discretion increase Mr. Guseinov’s base salary at such intervals
without amendment or modification of the Guseinov Agreement. Mr. Guseinov
will be entitled to participate in any incentive bonus compensation plan as the
Board may adopt from time to time; provided that Mr. Guseinov may not receive
more than 50% of his base salary for any twelve-month period. The Company
will provide, at its cost, at least $3,000,000 in key man life insurance on Mr.
Guseinov’s life during the term of the Guseinov Agreement and Mr. Guseinov will
have the right to designate the beneficiary of $1,000,000 of the policy or
policies, and the Company will be the beneficiary of $2,000,000 of the policy or
policies. If the Company terminates Mr. Guseinov’s employment without
cause during the term of the Guseinov Agreement, or takes actions that
constitute constructive termination, then Mr. Guseinov will be entitled to
accrued but unpaid salary, earned and pro rata bonus compensation, full vesting
of all unvested stock and stock options, vested benefits under the Company’s
employee benefit plans, continuing payment of Mr. Guseinov’s base salary in
effect at the time of termination for the greater of nine months following the
date of termination or the balance of the then applicable term and continuing
coverage of Mr. Guseinov, his spouse and children, if any, at the Company’s
expense, under any health and dental insurance plans that covered Mr. Guseinov
immediately prior to his termination, for a period of six months following the
date of termination.
Amended and Restated Key
Executive Employment Agreement with Kevin Harris (the “Harris
Agreement”)
The
Harris Agreement has a term of three years commencing as of January 1, 2010 and
will renew for successive one-year periods if not terminated sooner in
accordance with its terms. The Company will pay Mr. Harris an annual base
salary of $237,500 plus certain reimbursable expenses. The Company
will review Mr. Harris’s base salary every six months and the Board may in its
discretion increase Mr. Harris’s base salary at such intervals without amendment
or modification of the Harris Agreement. Mr. Harris shall retain his
existing stock options for 400,000 shares exercisable for $1.00 per share
granted pursuant to the terms of his original Key Executive Employment Agreement
with the Company (which includes bonus options for 2009 and 2010), of which
325,000 option shares are deemed fully vested and the remaining 75,000 option
shares will vest in three equal installments on June 30, 2010, September 30,
2010 and December 31, 2010. Mr. Harris will receive an additional option
to purchase 300,000 shares of common stock at an exercise price of $4.00 per
share. Mr. Harris will be entitled to participate in any incentive
bonus compensation plan as the Board may adopt from time to time; provided that
Mr. Harris may not receive more than 40% of his base salary for any twelve-month
period. The Company will provide, at its cost, at least $1,000,000 in term
life insurance on Mr. Harris’s life during the term of the Harris Agreement and
Mr. Harris will be the beneficiary of 100% of such policy or policies. If
the Company terminates Mr. Harris’s employment without cause during the term of
the Harris Agreement, or takes actions that constitute constructive termination,
then Mr. Harris will be entitled to accrued but unpaid salary, earned and pro
rata bonus compensation, full vesting of all unvested stock and stock options,
vested benefits under the Company’s employee benefit plans, continuing payment
of Mr. Harris’s base salary in effect at the time of termination for the greater
of nine months following the date of termination or the balance of the then
applicable term and continuing coverage of Mr. Harris, his spouse and children,
if any, at the Company’s expense, under any health and dental insurance plans
that covered Mr. Harris immediately prior to his termination, for a period of
six months following the date of termination.
Amended and Restated Key
Executive Employment Agreement with Igor Barash (the “Barash
Agreement”)
The
Barash Agreement has a term of three years commencing as of January 1, 2010 and
will renew for successive one-year periods if not terminated sooner in
accordance with its terms. The Company will pay Mr. Barash an annual base
salary of $218,750 plus certain reimbursable expenses. The Company
will review Mr. Barash’s base salary every six months and the Board may in its
discretion increase Mr. Barash’s base salary at such intervals without amendment
or modification of the Barash Agreement. The unvested portion of Mr.
Barash’s existing stock option for 150,000 shares exercisable for $1.00 per
share, granted on or about July 1, 2008, will immediately vest and Mr. Barash
will receive an additional option to purchase 50,000 shares of common stock at
an exercise price of $4.00 per share. Mr. Barash will be entitled to
participate in any incentive bonus compensation plan as the Board may adopt from
time to time; provided that Mr. Barash may not receive more than 30% of his base
salary for any twelve-month period. The Company will provide, at its cost,
at least $500,000 in term life insurance on Mr. Barash’s life during the term of
the Barash Agreement and Mr. Barash will be the beneficiary of 100% of such
policy or policies. If the Company terminates Mr. Barash’s employment
without cause during the term of the Barash Agreement, or takes actions that
constitute constructive termination, then Mr. Barash will be entitled to accrued
but unpaid salary, earned and pro rata bonus compensation, full vesting of all
unvested stock and stock options, vested benefits under the Company’s employee
benefit plans, continuing payment of Mr. Barash’s base salary in effect at the
time of termination for the greater of six months following the date of
termination or the balance of the then applicable term and continuing coverage
of Mr. Barash, his spouse and children, if any, at the Company’s expense, under
any health and dental insurance plans that covered Mr. Barash immediately prior
to his termination, for a period of six months following the date of
termination.
25
CYBERDEFENDER
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
9 - RESTATEMENT
On
November 19, 2010, the Company’s Audit Committee concluded that the Company’s
financial statements for the year ended December 31, 2009 and the quarters ended
March 31, 2009 and 2010, June 30, 2009 and 2010 and September 30, 2009 should be
restated in order to make the following adjustments: (i) the Black
Scholes value of the warrants issued by the Registrant in March 2009 pursuant to
a Media and Marketing Services Agreement should have been classified as an
operating expense rather than interest expense and that the Black Scholes value
of such warrants should be measured as of each monthly vesting date rather than
the grant date starting from March 2009 through September 2010; (ii) certain
warrants issued to consultants must be revalued as of their respective vesting
dates rather than the grant date, using the Black Scholes method; and (iii) all
of the Registrant’s advertising expenses starting in the fourth quarter of 2009
should have been expensed as incurred rather than capitalized and amortized
against revenues for a period of 12 months under ASC
340-20 (collectively, the “Adjustments”).
The
following tables set forth the effects of the restatement on certain line items
within our consolidated balance sheet at December 31, 2009 and our statement of
operations for the three months ended March 31, 2010 and 2009:
March
31, 2010
|
December
31, 2009
|
|||||||||||||||||||||||
Restated
|
Adjustments
|
As
Filed
|
Restated
|
Adjustments
|
As
Filed
|
|||||||||||||||||||
Deferred
charges, current
|
$ | 3,342,608 | $ | (3,985,002 | ) | $ | 7,327,610 | $ | 3,316,535 | $ | (2,312,753 | ) | $ | 5,629,288 | (1) | |||||||||
Total
Current Assets
|
$ | 13,300,047 | $ | (3,985,002 | ) | $ | 17,285,049 | $ | 9,223,207 | $ | (2,312,753 | ) | $ | 11,535,960 | ||||||||||
Additional
paid-in capital
|
$ | 44,088,708 | $ | 8,598,841 | $ | 35,489,867 | $ | 36,884,000 | $ | 3,825,872 | $ | 33,058,128 | (2)(4) | |||||||||||
Accumulated
deficit
|
$ | (53,256,695 | ) | $ | (12,583,843 | ) | $ | (40,672,852 | ) | $ | (44,930,550 | ) | $ | (6,138,625 | ) | $ | (38,791,925 | ) (3) | ||||||
Total
Stockholders’ Deficit
|
$ | (9,142,157 | ) | $ | (3,985,002 | ) | $ | (5,157,155 | ) | $ | (8,020,876 | ) | $ | (2,312,753 | ) | $ | (5,708,123 | ) |
Reference
(1)
Expensing of direct-response advertising costs as incurred rather than
capitalizing and amortizing per ASC 340-20.
(2)
Increase in the value of the warrants as revalued at vesting dates using black
scholes method.
(3) The
Adjustments as described above.
(4) Per
Note 2 above, there was a reclassification from common stock to additional
paid-in capital as a result of the merger.
For
the Three Months Ended
|
For
the Three Months Ended
|
|||||||||||||||||||||||
March
31, 2010
|
March
31, 2009
|
|||||||||||||||||||||||
Restated
|
Adjustments
|
As
Filed
|
Restated
|
Adjustments
|
As
Filed
|
|||||||||||||||||||
Media
and marketing services
|
$ | 10,229,931 | $ | 7,162,038 | $ | 3,067,893 | (1) | $ | 4,499,734 | $ | 756,040 | $ | 3,743,694 | (2) | ||||||||||
Investor
relations and other related consulting
|
$ | 549,543 | $ | 384,498 | $ | 165,045 | (2) | $ | 395,285 | $ | (824,717 | ) | $ | 1,220,002 | (2) | |||||||||
Total
Operating Expenses
|
$ | 14,429,056 | $ | 7,546,536 | $ | 6,882,520 | $ | 6,456,649 | $ | (68,677 | ) | $ | 6,525,326 | |||||||||||
LOSS
FROM OPERATIONS
|
$ | (8,106,776 | ) | $ | (7,546,536 | ) | $ | (560,240 | ) | $ | (3,944,723 | ) | $ | 68,677 | $ | (4,013,400 | ) | |||||||
Interest
expense
|
$ | 219,169 | $ | (1,101,318 | ) | $ | 1,320,487 | (2) | $ | 876,894 | $ | (35,615 | ) | $ | 912,509 | (2) | ||||||||
NET
LOSS
|
$ | (8,326,145 | ) | $ | (6,445,218 | ) | $ | (1,880,927 | ) | $ | (4,712,759 | ) | $ | 104,292 | $ | (4,817,051 | ) | |||||||
EPS
|
$ | (0.32 | ) | $ | (0.25 | ) | $ | (0.07 | ) | $ | (0.26 | ) | $ | 0.01 | $ | (0.27 | ) |
Reference
(1) $1.7
million relates to expensing of direct-response advertising costs as incurred
rather than capitalizing and amortizing per ASC 340-20 and $5.5 million relates
to reclassification and revaluation of warrants.
(2)
Reclassification and revaluation of warrants.
26
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q filed by CyberDefender Corporation (referred to as
“the Company”, “we”, “us” or “our”) 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:
·
|
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 upon the
intellectual property rights of others;
|
·
|
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.
|
We do not
intend to update forward-looking statements. You should refer to and carefully
review the risks identified in the Company’s Form 10-K for the year ended
December 31, 2009 and the information in future documents we file with the
Securities and Exchange Commission.
27
ITEM
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
OVERVIEW
We are a
provider of security software and services to the consumer and small business
market. We are located in Los Angeles, California. Our mission is to bring
to market advanced solutions to protect computer users against identity theft,
Internet viruses, spyware and related security threats and provide support
services to assist customers with their technology needs.
The
market in which we operate is highly competitive and rapidly changing. We
believe we can be successful in this market due to several factors. The
first is our proprietary earlyNETWORK security platform that uses a secure
peer-to-peer protocol, which we believe differentiates our core anti-malware
product and allows us to combat threats faster and more cost effectively than
our competitors. The second factor is that our security platform functions
complimentary to other security suites allowing the consumer to adopt multiple
security products for increased protection. The third factor is our focus on
growing our technical support service offering as these services provide the
consumer with our technical expertise necessary to insure that their technology
is working properly, thereby providing them with a higher degree of security.
The fourth factor is the expansion of our marketing efforts to (i) include
direct-response marketing and retail distribution through partnerships with GR
Match, LLC (“GRM”) and Allianex, leaders in those areas, and (ii) by expanding
internationally through our partnership with GRM. The fifth factor is our
focus on expanding our product offerings by creating new products internally and
by expanding the number of products marketed under the For
Dummies® brand.
We
believe that providing a “software only” solution to computer security problems
is not as effective as our comprehensive solution, which includes security and
optimization software in conjunction with access to remote technicians.
Our customers benefit from having a technician analyze their PC and repair
problems that they do not have the expertise to resolve. While we still do not
yet represent a significant presence in the security software industry, we
believe that the combination of our software security and optimization
solutions, our earlyNETWORK platform, our live remote tech-on-call capability
and our direct response marketing focus, has improved our ability to expand our
presence in the security software market.
We
evaluate our financial performance utilizing a variety of indicators. Four of
the primary indicators that we utilize to evaluate the ongoing performance of
our business include gross sales (a non-GAAP measure), income/loss from
operations, net cash used in operating activities and renewal revenue and
renewal rates. See the “Reconciliation of GAAP to Non-GAAP Financial
Measures” below.
Gross
sales are a non-GAAP measure which we define as total sales before refunds and
chargebacks and before deferring revenue for GAAP purposes. We believe gross
sales serves as an appropriate measure to be used in evaluating the performance
of our business as it gives a better indication of our operating performance and
the profitability of our marketing initiatives. Gross sales for the three
months ended March 31, 2010 increased $5.6 million, or 90%, to $11.8 million
from $6.2 million for the three months ended March 31, 2009. This increase
was mainly attributable to our increased direct-response advertising efforts
through our partnership with GRM. Also, as detailed in the table in the
section below titled “Trends, Events and Uncertainties”, both service revenues
and renewal revenues more than doubled from the same period in the prior
year. The increase in our service revenues was a direct result of our
efforts to increase service revenues through increased advertising and the
expansion of our call center infrastructure. Product and ancillary sales
also showed increases from the same period in the prior year due to our
increased marketing efforts.
Loss from
operations for the three months ended March 31, 2010 increased $4.2 million, or
108%, to $8.1 million from $3.9 million for the three months ended March 31,
2009. This increase in loss from operations is primarily attributable to the
value of the Media Services Warrant and other warrants issued to GRM. The
increased value of the warrants was due to two factors. The first, is the
increased number of warrants that vested due to an increase in the amount of
media spend per the Media Services Agreement and the second is the calculated
value of the warrants. During the three months ended March 31, 2010 and 2009,
1,546,138 and 50,000 warrants vested. The average value of the warrants
increased from $0.85 per warrant during the three months ended March 31, 2009 to
$3.55 per warrant during the three months ended March 31, 2010. The warrants
were valued using the Black-Scholes option-pricing model and must be revalued at
each vesting date. The calculated value of the warrants increased significantly
at each new vesting date as the stock price increased. The Black-Scholes
option-pricing model does not factor in the illiquidity of the underlying shares
when calculating the value of the warrants. The Company recorded non-cash
expense of $5.5 million to media and marketing services for the three months
ended March 31, 2010 as compared to $0.8 million for the three months ended
March 31, 2009. There were also increases in selling, general and administrative
costs and product development costs offset by an increase in net revenues.
The increase in product development costs is a direct result of our focus on
expanding our product offering. The increase in selling, general and
administrative costs is primarily attributable to increased salaries and wages
as a result of the expansion of our call center operations.
28
Net cash
used in operating activities for the three months ended March 31, 2010 increased
$0.2 million, or 20%, to $1.2 million from $1.0 million for the three months
ended March 31, 2009. Net cash used in operating activities during the three
months ended March 31, 2010 was primarily the result of our net loss of $8.3
million. Net loss was adjusted for non-cash items such as warrants issued
for media and marketing services of $5.5 million and shares and warrants issued
for services of $0.5 million. Other changes in working capital accounts include
an increase in restricted cash of $0.4 million, an increase in accounts
receivable of $0.3 million, an increase in accounts payable and accrued expenses
of $0.5 million and an increase of $0.8 million in deferred revenue resulting
from higher new customer and renewal sales.
Renewal
revenue, on a non-GAAP gross basis, for the three months ended March 31, 2010
increased $0.6 million, or 120%, to $1.1 million from $0.5 million for the three
months ended March 31, 2009. This increase was primarily attributable to the
increase in our subscriber base due for renewal. Renewal rates have remained
relatively consistent from the same period from the prior year. We believe
that we can improve our renewal rates, leading to increased renewal revenue. To
that end, we have signed a contract with Vindicia, a consumer subscription
billing platform, which we believe will help us improve customer retention.
Renewal revenue is important to us for two reasons. The first is that when
customers renew, it underscores our commitment to delivering top quality
products and services. Second, the cost of renewal customers is minimal. As we
continue to build our renewal base, our advertising costs as a percentage of
revenue should decrease, which we expect to help us reach
profitability.
There are
challenges and risks associated with our recent growth and the many initiatives
that we are focused on implementing. Our growth may not continue as
expected or at all. Any one or all of our new initiatives may not produce
the expected results including; (i) our contract with Vindicia to increase
renewal rates, (ii) our new international and retail distribution licensing
agreement with GRM, and (iii) our new products that we expect to launch under
our brand and the For
Dummies® brand.
If our growth does not continue or does not meet our expectations the costs
incurred to expand our call center infrastructure may not produce a return on
our investment and our costs may continue to exceed our revenues.
On March
31, 2010, we received net proceeds of $5 million from a promissory note issued
to GRM as part of a strategic investment in the Company. This investment
will be used to continue the expansion of our business. In addition to this
investment, we signed a license agreement granting GRM certain international and
domestic distribution rights which we believe will allow us to leverage GRM’s
powerful international sales and distribution channels as well as augment our
domestic retail marketing initiatives.
Additionally,
a key goal for 2010 is to list our common stock on a national exchange. We
filed our application with NASDAQ in March 2010 and it is currently being
reviewed. There is no assurance that our listing application will be
approved.
Critical Accounting Policies and
Estimates
The
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 U.S. 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.
The Company sells products, services and packages that include both products and
services.
The
Company recognizes revenue from the sale of software licenses under the guidance
of the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 985, “Software.”
Specifically,
the Company recognizes revenues from its software 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.
|
As part
of the sales price of some of its software licenses, 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. Certain of the
Company’s software licenses are in substance a subscription and therefore the
sale is deferred and recognized ratably over the term of the arrangement.
Revenue is recognized immediately for the sale of products that do not require
product updates.
29
The
Company recognizes revenue from the sale of its technical support services under
the guidance of the FASB ASC Topic 605-20, “Revenue Recognition –
Services.” Revenue is recognized immediately for our one-time technical
support service as it is performed when purchased. The Company recognizes a
portion of the sale of one of its annual services at the time of purchase when
all of the elements necessary for revenue recognition have occurred and the
remaining revenue is deferred over the annual term. Revenue is deferred
and recognized over the term of the service agreements for the technical support
services that are provided by third parties.
The
Company recognizes revenue on the sale of bundled products based on the
individual components included in the bundle. Revenue is recognized on the
individual components as detailed above.
The
Company also uses third parties to sell its software and therefore evaluates the
criteria of FASB ASC Topic 605, “Revenue Recognition,” 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 MyIdentityDefender Toolbar free to the subscriber and still
supports CyberDefender FREE 2.0, which was free to subscribers. Revenues are
earned from advertising networks which pay the Company to display advertisements
inside the software or through the toolbar search. 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.
The
Company’s policy with respect to refunds is to offer refunds within the first 30
days after the date of purchase. The Company may voluntarily issue refunds to
customers after 30 days of purchase, however the majority are issued within 30
days of the original sale and are charged against the associated sale or
deferred revenues (as applicable).
Advertising Costs. The
Company expenses advertising costs as incurred. As described in detail in Note 4
of the Notes to Condensed Financial Statement above, the Company issued warrants
for media and marketing services. The non-cash value of those warrants is
included in media and marketing services on the accompanying statements of
operations. For the three months ended March 31, 2010 and 2009, the
Company recorded non-cash expense of $5.5 million and $0.8 million,
respectively.
Software Development
Costs. The
Company accounts for software development costs in accordance with FASB ASC
Topic 985, “Software.”
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.
Stock Based Compensation and Fair
Value of our Shares. The Company applies FASB
ASC Topic 718, “Compensation –
Stock Compensation,” 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. For non-employee stock based
compensation, the Company recognizes an expense in accordance with FASB ASC
Topic 505, “Equity,”
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 FASB ASC
Topic 505, “Equity.”
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. An asset acquired in exchange for the issuance of
fully vested, non-forfeitable equity instruments should not be presented or
classified for accounting purposes as an offset to equity on the grantor’s
balance sheet once the equity instrument is granted. 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.
30
Contractual
Obligations
We are
committed under the following contractual obligations:
Contractual
Obligations
|
Payments
Due By Period
|
|||||||||||||||||||
Total
|
Less
than 1 year
|
1
to 3 Years
|
3
to 5 Years
|
Over
5 Years
|
||||||||||||||||
Debt
obligations
|
$ | 7,514,000 | $ | - | $ | 7,514,000 | $ | - | $ | - | ||||||||||
Capital
lease obligations
|
$ | 219,082 | $ | 73,590 | $ | 145,492 | $ | - | $ | - | ||||||||||
Operating
lease obligations
|
$ | 4,437,494 | $ | 18,301 | $ | 896,564 | $ | 933,242 | $ | 2,589,387 |
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 current and
former 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 condensed financial
statements.
Trends,
Events and Uncertainties
As
described above in the discussion of revenue recognition, we generally receive
payment upon the sale of our products and services and defer the revenue over
the life of the license agreement or service plan, which range from one to three
years.
The
following table summarizes our GAAP revenue and deferred revenue for each
quarter of the two most recently completed fiscal years as well as for the most
recent quarter.
Quarter Ended
|
Net Revenue
|
Cumulative
Deferred
Revenue
|
||||||
31-Mar-08
|
$ | 475,046 | $ | 1,019,071 | ||||
30-Jun-08
|
742,862 | $ | 1,673,889 | |||||
30-Sep-08
|
1,202,715 | $ | 3,220,738 | |||||
31-Dec-08
|
2,467,136 | $ | 4,552,953 | |||||
Fiscal
Year 2008 Total
|
$ | 4,887,759 | ||||||
31-Mar-09
|
$ | 3,191,630 | $ | 6,687,198 | ||||
30-Jun-09
|
3,686,644 | $ | 8,139,384 | |||||
30-Sep-09
|
4,427,404 | $ | 9,656,352 | |||||
31-Dec-09
|
7,536,215 | $ | 10,779,146 | |||||
Fiscal
Year 2009 Total
|
$ | 18,841,893 | ||||||
31-Mar-10
|
$ | 9,477,330 | $ | 11,619,760 | ||||
Fiscal
Year 2010 Total
|
$ | 9,477,330 |
31
The
following table summarizes our gross sales by category for each quarter of the
two most recently completed fiscal years as well as for the most recent quarter.
Gross sales are a non-GAAP measure that we use in assessing our operating
performance. We define gross sales as total sales before refunds and before
deferring revenue for GAAP purposes. We reference this non-GAAP financial
measure frequently in our decision-making as management believes it provides a
better indication of our operating performance and the profitability of our
marketing initiatives. We include this non-GAAP financial measure in our
earnings announcements in order to provide transparency to our investors and to
enable investors to better understand our operating performance. However, we do
not recommend that gross sales are solely used to assess our financial
performance or to formulate investment decisions.
Quarter
Ended
|
Software
|
Services
|
Ancillary
|
Renewals
|
Total
|
|||||||||||||||||||||||||||||||
31-Mar-08
|
$ | 147,423 | 25 | % | $ | 68,597 | 11 | % | $ | 72,858 | 12 | % | 311,470 | 52 | % | $ | 600,348 | |||||||||||||||||||
30-Jun-08
|
680,606 | 41 | % | 300,939 | 18 | % | 225,910 | 14 | % | 445,790 | 27 | % | 1,653,245 | |||||||||||||||||||||||
30-Sep-08
|
1,652,904 | 49 | % | 853,629 | 26 | % | 475,971 | 14 | % | 358,434 | 11 | % | 3,340,938 | |||||||||||||||||||||||
31-Dec-08
|
2,107,307 | 49 | % | 1,493,234 | 35 | % | 669,477 | 16 | % | - | 0 | % | 4,270,018 | |||||||||||||||||||||||
Fiscal
Year 2008 Totals
|
$ | 4,588,240 | 47 | % | $ | 2,716,399 | 28 | % | $ | 1,444,216 | 15 | % | $ | 1,115,694 | 11 | % | $ | 9,864,549 | ||||||||||||||||||
31-Mar-09
|
$ | 2,475,095 | 40 | % | $ | 2,645,857 | 43 | % | $ | 606,051 | 10 | % | $ | 463,948 | 7 | % | $ | 6,190,951 | ||||||||||||||||||
30-Jun-09
|
2,501,266 | 40 | % | 2,678,978 | 43 | % | 584,144 | 9 | % | 466,747 | 8 | % | 6,231,135 | |||||||||||||||||||||||
30-Sep-09
|
2,666,274 | 40 | % | 2,915,731 | 43 | % | 461,120 | 7 | % | 699,068 | 10 | % | 6,742,193 | |||||||||||||||||||||||
31-Dec-09
|
4,401,569 | 45 | % | 3,705,830 | 38 | % | 982,460 | 10 | % | 717,949 | 7 | % | 9,807,808 | |||||||||||||||||||||||
Fiscal
Year 2009 Totals
|
$ | 12,044,204 | 42 | % | $ | 11,946,396 | 41 | % | $ | 2,633,775 | 9 | % | $ | 2,347,712 | 8 | % | $ | 28,972,087 | ||||||||||||||||||
31-Mar-10
|
$ | 4,092,152 | 35 | % | $ | 5,802,486 | 49 | % | $ | 856,297 | 7 | % | $ | 1,062,473 | 9 | % | $ | 11,813,408 | ||||||||||||||||||
Fiscal
Year 2010 Totals
|
$ | 4,092,152 | 35 | % | $ | 5,802,486 | 49 | % | $ | 856,297 | 7 | % | $ | 1,062,473 | 9 | % | $ | 11,813,408 |
The
tables above indicate an upward trend in gross sales, GAAP revenue and deferred
revenue resulting from our focus on promoting our new products and services and
the addition of our new marketing channels, as discussed above. We cannot
guarantee that this upward trend will continue, even with increased spending on
advertising.
Reconciliation
of GAAP to Non-GAAP Financial Measures
The
following is a reconciliation of gross sales to net revenue for the three months
ended March 31, 2010 and 2009:
2010
|
2009
|
|||||||
Gross
Sales
|
11,813,408 | 6,190,951 | ||||||
Less:
Refunds
|
(1,495,464 | ) | (865,076 | ) | ||||
Less:
Change in deferred revenue
|
(840,614 | ) | (2,134,245 | ) | ||||
Net
revenue
|
9,477,330 | 3,191,630 |
Other
trends, events and uncertainties that may impact our liquidity are included in
the discussion below.
32
RESULTS
OF OPERATIONS
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
Net
Revenue
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Net
Revenue
|
$ | 9,477,330 | $ | 3,191,630 | $ | 6,285,700 | 197 | % |
The
increase in net revenue was primarily attributable to our increased
direct-response advertising efforts through our partnership with GRM and the
increase in our service revenue as a result of our efforts to increase service
revenue through increased advertising and the expansion of our call center
operations. See the discussion of advertising expenses below. Revenue from
product sales increased $2.7 million, or 159%, to $4.4 million for the three
months ended March 31, 2010 from $1.7 million for the three months ended March
31, 2009. Revenue from services increased $3.1 million, or 344%, to $4.0 million
for the three months ended March 31, 2010 from $0.9 million for the three months
ended March 31, 2009.
Cost
of Sales
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Cost
of Sales
|
$ | 3,155,050 | $ | 679,704 | $ | 2,475,346 | 364 | % |
This
increase in cost of sales was primarily attributable to the expansion of our
internal and external call center operations to support the increase in sales of
our technical support services. Cost of sales includes compensation related
expenses of our internal technical support staff, costs associated with the
training and initial launch of our services agreement with an external call
center as well as the cost of outsourced technical support representatives
provided by a third party on a revenue share basis. Compensation-related
expenses for our internal technical support staff totaled $0.8 million for the
three months ended March 31, 2010 as compared to $0 for the three months ended
March 31, 2009. Expenses related to the training and initial launch of the
external call center totaled $0.8 million for the three months ended March 31,
2010 as compared $0 for the three months ended March 31, 2009. Outsourced
technical support commissions increased $0.8 million, or 160%, to $1.3 million
for the three months ended March 31, 2010 from $0.5 million for the three months
ended March 31, 2009.
Operating
Expenses
Media
and marketing services
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Media
and marketing services
|
$ | 10,229,931 | $ | 4,499,734 | $ | 5,730,197 | 127 | % |
Media and
marketing services expense is comprised primarily of non-cash expense related to
the Media Services Warrant and other warrants issued to GRM. Media and
marketing services costs also include media and channel fees, including online
and offline advertising and related functional resources. This increase was
primarily attributable to the non-cash expense related to the Media Services
Warrant and other warrants issued to GRM. Direct advertising costs were
$4.4 million and $3.6 million for the three months ended March 31, 2010 and
2009, respectively.
33
Product
Development
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Product
Development
|
$ | 752,127 | $ | 299,737 | $ | 452,390 | 151 | % |
Product
development expenses are primarily comprised of research and development costs
associated with the continued development of both current and new products. This
increase is primarily attributable to increased staffing to ensure the ongoing
support and improvement of all of our products and as a result of the increase
in the number of products currently offered and expected to be offered under the
For
Dummies® brand.
Selling,
General and Administrative
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
S,G
& A
|
$ | 2,877,213 | $ | 1,251,557 | $ | 1,625,656 | 130 | % |
Selling,
general and administrative expenses are primarily comprised of salaries and
wages, third party credit card processing fees, legal and professional fees,
rent and other normal operating expenses.
This
increase was primarily attributable to an increase in salaries and wages and
related compensation expenses, i.e. benefits and payroll taxes, due to the
increase in staffing across all departments required as a result of the increase
in sales. The largest increase was seen in our customer service department.
Additionally, there was an overall increase in expenses in all S,G & A
categories due to the increased staffing and sales activities in the current
period. S,G & A has decreased as a percentage of net sales to 30% for the
three months ended March 31, 2010 from 39% for the three months ended March 31,
2009.
Investor
Relations and Other Related Consulting
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Investor
relations and other related consulting
|
$ | 549,543 | $ | 395,285 | $ | 154,258 | 39 | % |
This
increase was primarily attributable to the calculation used to value the
warrants issued for services. The warrants were valued using the Black-Scholes
option-pricing model and must be revalued at each vesting date. The calculated
value of the warrants increases as the stock price increases.
Loss
From Operations
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Loss
from operations
|
$ | 8,106,776 | $ | 3,944,723 | $ | 4,162,053 | 106 | % |
This
increase in loss from operations is primarily attributable to the value of the
Media Services Warrant and other warrants issued to GRM. The warrants were
valued using the Black-Scholes option-pricing model and must be revalued at each
vesting date. The calculated value of the warrants increased significantly at
each new vesting date as the stock price increased. The Black-Scholes
option-pricing model does not factor in the illiquidity of the underlying shares
when calculating the value of the warrants. The Company recorded non-cash
expense of $5.5 million to media and marketing services for the three months
ended March 31, 2010 as compared to $0.8 million for the three months ended
March 31, 2009. There were also increases in selling, general and administrative
costs and product development costs offset by an increase in net
revenues.
34
Other
Income/(Expense)
Change
in fair value of derivative liabilities
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Change
in fair value of derivative liabilities
|
$ | -0- | $ | 109,058 | $ | (109,058 | ) | (100 | )% |
As more
fully described in the notes to the financial statements, on January 1,
2009 we adopted the provisions of FASB ASC Topic 815, “Derivatives and Hedging,”
that apply to any freestanding financial instruments or embedded features that
have the characteristics of a derivative. 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. During August 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. The change in fair value of these
instruments for the three months ended March 31, 2009 resulted in a gain of
$109,058.
Interest
expense, net
Change in
|
||||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Interest
expense, net
|
$ | 219,169 | $ | 876,894 | $ | (657,725 | ) | (75 | )% |
The
decreased interest expense was primarily attributable to the decrease in
interest and amortization expense from the 10% Convertible Promissory Notes and
the 10% Secured Debentures that were converted during 2009.
Liquidity
and Capital Resources
As
detailed in the section above titled “Trends, Events and Uncertainties”, our
revenues have been increasing on a quarterly basis since January
2008.
To help
with our cash flow, we occasionally sell our debt or equity securities. We
currently have outstanding $2.2 million in principal amount of our 8%
convertible debt securities and $5.3 million principal amount of our 9%
convertible debt securities.
At March
31, 2010, we had cash totaling $6.9 million. In the three months ended
March 31, 2010, we generated positive cash flows of $3.6 million primarily
through financing activities as described below. On December 7, 2010 we
entered into an arrangement with GRM dated December 3, 2010. The agreement
provided for a credit facility up to $5 million including $4,287,660 of
outstanding trade payables owed by us to GRM on December 3, 2010 pursuant to the
Media Services Agreement. All outstanding principal and accrued but unpaid
interest is due and payable in full at the earlier of either March 31, 2011 or
the closing of the sale and issuance of our debt or equity securities in an
aggregate amount exceeding $10 million. We intend to obtain additional financing
to satisfy the obligation. However, there can be no assurances that we
will be able to obtain additional financing on terms acceptable to us, or at
all. In the event we are unable to obtain additional financing, we expect we
would be able to renegotiate the terms of the GRM credit facility, however,
there can be no assurance that this would occur. Failure to obtain
additional funding or an amendment to the GRM credit facility may require us to
significantly curtail our operations which could have a material adverse impact
on the Company’s results of operations and financial position.
Cash
provided/(used) during the three months ended March 31, 2010
included:
Operating
Activities
Net cash
used in operating activities during the three months ended March 31, 2010 was
primarily the result of our net loss of $8.3 million. Net loss was
adjusted for non-cash items such as warrants issued for media and marketing
services of $5.5 million and shares and warrants issued for services of $0.5
million. Other changes in working capital accounts include an increase in
restricted cash of $0.4 million, an increase in accounts receivable of $0.3
million, an increase in accounts payable and accrued expenses of $0.5 million
and an increase of $0.8 million in deferred revenue resulting from higher new
customer and renewal sales.
35
Our
primary source of operating cash flow is the collection of sales receipts from
our customers and the timing of payments to our vendors and service
providers. During the three months ended March 31, 2010, we began offering
payment plans to our customers for the purchase of multi-year technical support
service plans. We expect this change to increase gross sales but to also impact
operating cash flow as sales receipts will be spread over two months instead of
being received upon the sale.
The
increase in cash related to accounts payable and accrued expenses was $0.5
million. 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. We did not make any significant changes to the timing of
payments to our vendors during the three months ended March 31,
2010.
Our
working capital deficit at March 31, 2010, defined as current assets minus
current liabilities, was $3.2 million as compared to a working capital deficit
of $6.2 million at December 31, 2009. The increase in working capital
of approximately $3.0 million from December 31, 2009 to March 31, 2010 was
primarily attributable to an increase in cash of $3.6 million and an increase in
restricted cash of $0.4 million offset by an increase in accounts payable and
accrued expenses of $0.4 million and an increase in current portion of deferred
revenue of $0.6 million, resulting from increased sales.
Investing
Activities
Net cash
used in investing activities during the three months ended March 31, 2010 was
$0.4 million, 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 three months
ended March 31, 2009 was $0 and also related to the purchase of property and
equipment.
Financing
Activities
Cash
provided by financing activities during the three months ended March 31, 2010
was $5.1 million, which was primarily the result of the net proceeds of $4.9
million from the issuance of a convertible note and the exercise of common stock
warrants and stock options totaling $0.2 million. Cash provided by
financing activities during the three months ended March 31, 2009 was primarily
the result of issuances of notes payable, net of commissions, totaling $0.3
million.
Other
than as discussed above, we know of no trends, events or uncertainties that are
reasonably likely to impact our future liquidity.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The
registrant is a smaller reporting company and is not required to provide this
information.
ITEM
4T. CONTROLS AND PROCEDURES
We
conducted an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”) as of March 31, 2010, to ensure that information required to be disclosed
by us in the reports filed or submitted by us under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that as of March 31, 2010, our disclosure controls and procedures were
not effective at the reasonable assurance level due to the material weakness
described below.
36
A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Management has identified
the following material weakness which has caused management to conclude that, as
of March 31, 2010, our disclosure controls and procedures were not effective at
the reasonable assurance level:
We have
become aware that in applying accounting standards, our control environment is
dependent upon a review function and the ability to recognize and obtain
assistance for transactions. Because of the failure of this control, we
were required to adjust (i) the Black Scholes value of the warrants issued by us
in March 2009 pursuant to a Media and Marketing Services Agreement which should
have been classified as an operating expense rather than interest expense and
that the Black Scholes value of such warrants should have been measured as of
each monthly vesting date rather than the grant date starting from March 2009
through September 2010; (ii) certain warrants issued to consultants which must
be revalued as of their respective vesting dates rather than the grant date,
using the Black Scholes method; and (iii) all of our advertising expenses
starting in the fourth quarter of 2009 which should have been expensed as
incurred rather than capitalized and amortized against revenues for a period of
12 months under ASC 340-20.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during
the first quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
37
PART
II - OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
On
February 4, 2010, Scott Wade, a former employee, filed an action against the
Company in the Superior Court of the State of California, County of Los Angeles,
alleging wrongful termination, disability discrimination, failure to pay wages
and breach of contract. Mr. Wade seeks an unspecified amount of damages
(general and special, statutory and punitive) as well as injunctive relief and
attorney’s fees and court costs. The Company believes the claim is without
merit and intends to vigorously defend it.
ITEM 1A. RISK FACTORS
Not
applicable.
ITEM 2.
UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the three months ended March 31, 2010, four investors exercised warrants to
purchase 126,750 shares of common stock exercisable at prices ranging from $1.00
to $1.25 per share. We relied on section 4(2) of the Securities Act of 1933 to
issue the common stock inasmuch as the securities were issued to accredited
investors without any form of general solicitation or general
advertising.
For
information relating to additional unregistered securities that were sold during
the three months ended March 31, 2010, please see our Current Report on Form
8-K, which was filed with the Securities and Exchange Commission on April 6,
2010.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
According
to the terms of our 2006 Debentures, we are 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 was due. We failed to make
all of the interest payments that were due. On March 31, 2010, we have accrued
$69,982 in interest due through September 12, 2009 under these
obligations.
ITEM 4.
REMOVED AND
RESERVED
ITEM 5.
OTHER INFORMATION
None.
38
ITEM 6.
EXHIBITS
3.1
|
Articles
of Incorporation, as amended (1)
|
|
3.2
|
Bylaws
(1)
|
|
3.2.1
|
Amendment
No. 1 to Bylaws (2)
|
|
3.2.2
|
Amendment
No. 2 to Bylaws (2)
|
|
10.1
|
Loan
and Securities Purchase Agreement dated March 31, 2010 between the
registrant and GR Match, LLC (3)
|
|
10.2
|
9%
Secured Convertible Promissory Note dated March 31, 2010 in favor of GR
Match, LLC (3)
|
|
10.3
|
Security
Agreement dated March 31, 2010 between the registrant and GR Match, LLC
(3)
|
|
31.1
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*
|
|
31.2
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*
|
|
32
|
Certification
Pursuant to Section 1350 of Title 18 of the United States
Code*
|
(1)
Incorporated by reference from the 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 Amendment No. 1 to the Annual Report on Form 10-K
filed with the Securities and Exchange Commission on May10, 2010.
(3)
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on May 17, 2010.
*Filed
herewith.
39
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CYBERDEFENDER
CORPORATION
|
||
By:
|
/s/ Gary
Guseinov
|
|
Date:
December 20, 2010
|
Gary
Guseinov, President and
|
|
Chief
Executive Officer
|
||
By:
|
/s/ Kevin
Harris
|
|
Date:
December 20, 2010
|
Kevin
Harris, Chief Financial
Officer
|
40