As filed with the Securities and Exchange
Commission on June 3, 2011
No. 333-173661
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Trustwave Holdings,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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7372
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11-3745786
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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Trustwave Holdings,
Inc.
70 W. Madison,
Suite 1050
Chicago, Illinois
60602
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Robert J. McCullen
Chairman, Chief Executive
Officer and President
Trustwave Holdings,
Inc.
70 W. Madison,
Suite 1050
Chicago, Illinois
60602
(312) 873-7500
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies of all communications,
including communications sent to agent for service, should be
sent to:
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Dennis M. Myers, P.C.
Kirkland & Ellis LLP
300 North LaSalle
Chicago, Illinois 60654
(312) 862-2000
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John J. Sabl
Sidley Austin LLP
One South Dearborn
Chicago, Illinois 60603
(312) 853-7000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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Smaller reporting company o
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. The
prospectus is not an offer to sell these securities nor a
solicitation of an offer to buy these securities in any
jurisdiction where the offer and sale is not permitted.
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PROSPECTUS
(Subject to completion)
Issued
June 3, 2011
SHARES
COMMON STOCK
This is the initial public offering of common stock by Trustwave
Holdings, Inc. We are selling shares of common stock. Prior to
this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is
expected to be between $ and
$ per share.
We intend to apply to list our common stock
on
under the proposed symbol
.
Investing in our common stock involves risks. See Risk
Factors beginning on page 11.
PRICE
$
PER SHARE
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Underwriting
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Price to
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Discounts and
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Proceeds to
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Public
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Commissions
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Company
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Per Share
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$
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$
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$
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Total
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$
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$
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$
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We have granted the underwriters a
30-day
option to purchase up
to
additional shares of common stock on the same terms as set forth
above. See the section of this prospectus entitled
Underwriting.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities nor passed upon the accuracy or adequacy of the
disclosures in the prospectus. Any representation to the
contrary is a criminal offense.
The underwriters expect to deliver the shares on or
about ,
2011.
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MORGAN
STANLEY |
J.P. MORGAN |
BARCLAYS CAPITAL |
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WILLIAM
BLAIR & COMPANY |
BMO CAPITAL MARKETS |
,
2011
TABLE OF
CONTENTS
We have not authorized anyone to provide any information other
than that contained or incorporated by reference in this
prospectus or in any free writing prospectus prepared by or on
behalf of us or to which we have referred you. We take no
responsibility for, and can provide no assurance as to the
reliability of, any other information that others may give you.
We are offering to sell, and seeking offers to buy, shares of
our common stock only in jurisdictions where such offers and
sales are permitted. The information in this prospectus or a
free-writing prospectus is accurate only as of its date,
regardless of its time of delivery or of any sale of shares of
our common stock. Our business, financial condition, results of
operations and prospects may have changed since that date.
Until ,
2011 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
dealers obligation to deliver a prospectus when acting as
an underwriter and with respect to unsold allotments or
subscriptions.
TRADEMARKS
AND TRADENAMES
This prospectus includes our trademarks and service marks such
as
Trustwave®,
TrustKeeper®,
SpiderLabs®,
ModSecurity®,
TrustedApp®,
TrustedSentry®,
Smart
Tag®,
Trusted
Commerce®,
Trustwave Security Data
Warehousetm
and
WebDefend®
which are protected under applicable intellectual property laws
and are the property of Trustwave Holdings, Inc. or its
subsidiaries. This prospectus also contains trademarks, service
marks, trade names and copyrights of other companies, which are
the property of their respective owners. Solely for convenience,
trademarks and trade names referred to in this prospectus may
appear without the
®
or
tm
symbols. We do not intend our use or display of other
parties trademarks, trade names or service marks to imply,
and such use or display should not be construed to imply, a
relationship with, or endorsement or sponsorship of us by, these
other parties.
i
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision. You
should read this entire prospectus, including the sections
entitled Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of
Operations in this prospectus before deciding to invest in
our common stock. Some of the statements in this summary
constitute forward-looking statements, with respect to which you
should review the section of this prospectus entitled
Forward-Looking Statements. Except where the context
otherwise requires or where otherwise indicated, the terms
Trustwave, we, us,
our, our Company and our
business refer to Trustwave Holdings, Inc., together with
its consolidated subsidiaries as a combined entity. Our fiscal
year ends on December 31 of each calendar year.
TRUSTWAVE
HOLDINGS, INC.
Trustwave is a leading provider of on-demand data security
compliance solutions that enable businesses and other
organizations of all sizes to efficiently achieve and maintain
compliance with regulatory requirements and industry standards.
Our compliance management solutions, including our easy-to-use
software-as-a-service
TrustKeeper®
offering, have helped hundreds of thousands of organizations
simplify the complex process of validating compliance.
Additionally, our broad suite of compliance enablement solutions
remediates data security deficiencies, allowing our customers to
achieve and maintain compliance in a cost effective manner.
These solutions assist our subscribers in comprehensively
securing their network infrastructure, data communications and
sensitive information assets, protecting them against the
increasing threats of unauthorized access, fraudulent activity
and other intrusions or breaches. We have been successful in
rapidly expanding our customer base across a broad range of
industries as a result of our differentiated partner network,
which is comprised of many of the worlds largest financial
institutions and other organizations influential to the
compliance and data security mandates of their customers.
Our data security compliance solutions can be applied to address
many regulations and standards, including the Payment Card
Industry data security standards, or PCI, the Health
Insurance Portability and Accountability Act, or
HIPAA, the Federal Information Security Management
Act, or FISMA, and a number of other federal, state
and international regulations and standards. To date, we have
primarily focused on PCI compliance, as it is among the best
defined and broadest reaching data security standards. Through
this effort, we have become a leader in facilitating PCI
compliance, helping organizations address the risks and
challenges associated with payment card fraud and compromise.
Financial institutions are generally responsible for the risk of
payment card fraud or compromise and security breaches involving
their payment card accepting customers to the extent they are
unable to recover losses from them or other parties. In turn,
many of these institutions rely on our knowledge and proprietary
technology to help their customers validate, achieve and
maintain compliance.
We believe data security compliance represents a large and
growing addressable market, driven in part by PCI compliance.
For example, MasterCard estimates that its payment cards were
accepted at approximately 30 million locations worldwide as
of December 31, 2010. We expect financial institutions to
increasingly enforce PCI compliance among their payment card
accepting customers. In addition, we believe that the number of
locations where data is stored or transmitted, and consequently
require protection, will continue to increase for financial
transactions, as well as health care, government and other
services.
Our solutions include our industry leading
software-as-a-service, or SaaS, TrustKeeper
compliance management offering along with a comprehensive suite
of proprietary compliance enablement solutions. TrustKeeper and
the TrustKeeper Agent assist organizations in validating
compliance by analyzing, aggregating and reporting on prohibited
data storage, systems configurations and security policy
settings on subscribers systems in centralized or
distributed information technology, or IT,
environments. In addition, our compliance enablement offerings
provide a comprehensive, integrated turnkey suite of data
security solutions, including encryption, extensible threat
management, security information and event management, network
access control, web application firewalls and data loss
prevention. These solutions help address vulnerabilities
detected by TrustKeeper, allowing our customers to achieve and
maintain compliance.
1
We serve customers of all sizes, from eight of the top ten
Fortune 500 companies in 2010 to small- and medium-sized
businesses and other organizations. Our customers include
subscribers, which are businesses, government entities and other
organizations that purchase our subscription services either
directly or are provided our service through a member of our
partner network, as well as purchasers of our professional
services or perpetual-license products. Examples of our
customers include financial services companies, franchised
restaurants, hospitality chains, hospitals and physician
networks, technology, media and telecommunications companies,
educational organizations and retail operations.
We have reached many of our customers through our partner
network, which is comprised of approximately 75 organizations
influential to the compliance and data security mandates of
their customers. Our PCI partner network includes many of the
worlds leading financial institutions, major payment card
companies, and other members of the payment and IT ecosystem,
which we believe expands our global reach and reputation. Set
forth below in alphabetical order and by the geography in which
we primarily serve them is a sample of organizations that we
believe are important participants within the payment and IT
ecosystem with which we do business as a direct customer, most
of which are also members of our partner network:
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North America
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American Express*
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JPMorgan Chase*
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Banc of America Merchant Services*
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MICROS Systems*
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Discover*
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Moneris*
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EVO
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Sage Payment Solutions*
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Fifth Third Processing Solutions*
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TSYS Merchant Solutions*
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First American Payment Systems*
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U.S. Bank*
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First Data Corporation*
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Visa
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Global Payments*
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Wells Fargo*
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Rest of World
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Atos Worldline*
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Nordea Bank*
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Barclays Capital Services
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Redecard
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China UnionPay Data
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Swedbank*
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Cielo
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Transbank
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First National Bank (South Africa)
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WorldPay (UK) Limited*
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* Indicates a member of our
partner network
In addition to PCI, we plan to expand our partner network in
health care, government services and other sectors, facilitating
the distribution of our solutions that address relevant
regulations and standards, such as HIPAA and FISMA.
As of March 31, 2011, we had over 900,000 TrustKeeper
subscriptions, primarily consisting of payment card acceptance
locations, the majority of which were identified by our partner
network as requiring PCI compliance services. Each payment card
acceptance location of a subscriber is generally counted as a
separate TrustKeeper subscription when either one of our
partners or the subscriber has initiated payment for our
service. As of the same date, we estimate that there were
approximately 6 million payment card acceptance locations within
our existing PCI partner network. A number of our partners are
in the midst of a multi-year effort to monitor and enforce PCI
compliance among their payment card accepting customers, and in
turn we expect the number of subscriptions to increase, although
we do not expect this effort will result in all of them becoming
subscribers and some may already be covered by our enterprise
arrangements.
Our revenue increased from $58.3 million in 2008 to
$73.1 million in 2009 and $111.5 million in 2010, and
our net loss for each of those years was $2.0 million,
$1.5 million and $4.6 million, respectively. In the
same periods, our Adjusted EBITDA increased from
$0.4 million in 2008 to $3.1 million in 2009 and
$4.9 million in 2010. We believe Adjusted EBITDA is useful
to investors in evaluating our operating performance. Adjusted
EBITDA should not be considered as an alternative to net income
(loss), which is the most directly comparable financial measure
calculated in accordance with GAAP, or any other measure of
financial performance calculated in accordance with GAAP. For a
discussion of Adjusted EBITDA and a reconciliation of Adjusted
EBITDA to net loss, see note 3 to the tables included in
Summary Historical and Pro Forma Consolidated Financial
Data.
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Industry
Background
We believe businesses, government entities and other
organizations face a number of challenges in achieving and
maintaining compliance with regulatory requirements and industry
standards, including:
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increasing data security threats, which have led to a heightened
regulatory and compliance environment;
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regulatory and compliance requirements that are becoming
increasingly complex and challenging to achieve and
maintain; and
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many existing compliance and data security solutions that are
highly complex and expensive.
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As a result, we believe there is an increasing need for
on-demand, scalable, automated and cost-effective data security
compliance solutions that can help these organizations address
these challenges in real time and simplify the process for
validating, achieving and maintaining compliance. According to
International Data Corporation, or IDC, the total
governance, risk and compliance infrastructure software market
is expected to grow from $17.3 billion in 2009 to
$34.5 billion in 2014, representing a compound annual
growth rate of 14.8%. According to IDC, the
software-as-a-service, or on-demand, software market is expected
to grow from $13.1 billion in 2009 to $40.5 billion in
2014, representing a compound annual growth rate of 25.3%.
Our
Solutions
Key differentiators of our solutions include:
Simplifying complex compliance
processes. Our on-demand solutions simplify
and automate complex compliance processes by facilitating
completion of compliance assessments, automating the diagnosis
of an organizations security posture and providing
easy-to-understand
actionable information. Many of our other solutions are
delivered as a service, also simplifying implementation and
facilitating use, which is particularly important to
organizations with limited IT resources and personnel.
Scalable and flexible. Our solutions
are designed to satisfy our customers needs as their
businesses grow and to address the needs of organizations with
complex, geographically dispersed and heterogeneous IT
infrastructures, regardless of size.
Cost-effective to achieve and maintain
compliance. We provide our customers with
many cost-effective solutions delivered as a service,
eliminating much of the need for up-front infrastructure costs
to achieve and maintain compliance. Our integrated solutions
also reduce the need for in-house personnel resources and
out-of-pocket
costs to monitor and demonstrate on-going compliance.
Comprehensive and integrated
solutions. We offer a broad suite of
compliance solutions that typically work together in an
integrated fashion to identify non-compliant areas as well as to
remediate data security vulnerabilities.
Trusted brand. We are a leading
provider of on-demand data security compliance solutions,
endorsed by and marketed through many of the worlds
largest, most trusted financial institutions and other
well-known organizations with whom we partner to deliver our
solutions.
Differentiated proprietary knowledge and
technology. Our large, global customer
footprint gives us visibility into existing and potential
threats, which is enhanced by our SpiderLabs team, a leader in
analyzing security threats and incident response. This allows us
to proactively develop our solutions to address specific
customer needs and protect against the latest security threats.
Our
Business Model
We have developed a differentiated business model that has the
following attributes:
Differentiated
go-to-market
strategy. We have developed a partner network
comprised of a number of the worlds largest financial
institutions, payment service providers and other organizations
influential to the compliance and data security mandates of
their customers. These organizations serve as differentiated and
cost effective distribution partners for us, and we typically
co-brand and co-market with these organizations to their
customers.
3
On-demand delivery model. Many of our
solutions are delivered on-demand, including our
software-as-a-service
TrustKeeper solution, which is offered through a subscription
over the Internet using a multi-tenant architecture. This model
allows us to quickly deliver a modular service to which
organizations can easily subscribe without significant upfront
capital investment or the requirement for professional services
to integrate software or appliances into their environment.
Initiate and build upon subscriber
relationships. We typically initiate a
relationship with a subscriber through one of our network
partners by offering our compliance management solution. We then
build upon our relationship by offering our subscribers
integrated compliance enablement solutions to cost-effectively
enhance their security posture and help them achieve data
security compliance.
Global delivery capabilities. As of
March 31, 2011, we served customers in approximately 65
countries through employees and dedicated third-party support
located in approximately 20 countries. We believe our
multilingual, on-demand solutions allow us to efficiently serve
organizations of all sizes worldwide.
Our
Growth Strategy
The following are key elements of our growth strategy:
Grow subscriber base within existing partner
network. We plan to grow our subscriber base
globally by converting more of our PCI partner network payment
card acceptance locations into TrustKeeper subscriptions. We
estimate that, as of March 31, 2011, there were
approximately 6 million payment card acceptance locations
within our existing PCI partner network.
Build upon relationships with existing subscriber
base. We believe that our compliance
management solutions will continue to generate cross-selling
opportunities to our installed base of our comprehensive suite
of compliance enablement solutions as subscribers seek to
remediate vulnerabilities identified by the compliance
management process. In addition, we anticipate further expansion
into the network of branches and franchises of our distributed
enterprise customers.
Expand portfolio of new
technologies. We expect to continue to
develop and enhance our solutions to address specific customer
needs and the latest security threats. Some of our products that
are designed to address compliance with PCI can also be utilized
by our customers to address compliance with certain requirements
of other regulations and standards. We plan to leverage our
expertise in addressing PCI compliance to further expand our
offerings in other data security compliance regimes such as
HIPAA and FISMA, among others.
Extend our partner network. We plan to
continue to seek additional partners to reach more payment card
acceptance locations worldwide. Additionally, we plan to develop
partner networks in health care, government services and other
sectors, facilitating the distribution of our solutions that
address relevant regulations and standards.
Expand internationally. Our revenue
from customers outside of our North America segment has grown
from $10.4 million in 2008 to $16.8 million in 2010,
an increase of 62%. We plan to increase our international
presence, primarily by growing our presence in the approximately
65 countries in which we have customers.
Summary
Risk Factors
We are subject to a number of risks, including risks that may
prevent us from achieving our business objectives or may
adversely affect our business, financial condition, results of
operations, cash flows and prospects. You should carefully
consider these risks, including those highlighted in the section
entitled Risk Factors, before investing in our
common stock. Risks relating to our business include, among
others, the following:
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our business and results of operations could be materially
adversely affected if PCI is changed, cancelled, replaced or not
enforced, new or different technologies that minimize the need
for PCI are widely adopted, or we lose any of our PCI
certifications;
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the loss of a significant member or group of members of our
partner network, the failure to engage new partners or the
decision by one of our partners to use our products less or
compete against us could materially adversely affect our
operations and sales;
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if we are unable to develop and maintain relationships with
businesses, government entities and other organizations within
our existing partner network that have not enrolled their
customers into TrustKeeper, or whose customers have enrolled but
have not become subscribers, our operating results may decline;
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we face intense competition in our market, both from larger,
better-known companies and from more targeted competitors, and
we may lack sufficient financial or other resources to maintain
or improve our competitive position;
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we may not be able to compete effectively with companies that
integrate or bundle products similar to ours with their other
product offerings;
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if we are not successful in executing our strategy to increase
our sales to larger enterprises, our results of operations may
suffer; or
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our efforts to expand our product and service offerings beyond
the PCI market may not succeed.
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Recapitalization
Prior to the completion of this offering, we intend to complete
an internal recapitalization pursuant to which our outstanding
shares of Class A common stock, Class B common stock,
Series A-1
preferred stock,
Series A-2
preferred stock and Series B preferred stock will be
converted into a single class of common stock on a
share-for-share
basis and, immediately thereafter, we will effect a
one-for- reverse stock split with
respect to our outstanding common stock. For ease of reference,
we collectively refer to our
Series A-1
preferred stock,
Series A-2
preferred stock and Series B preferred stock as our
preferred stock, and to the conversion of all of our
outstanding Class A common stock, Class B common stock
and preferred stock into a single class of common stock and the
one-for- reverse
stock split in connection therewith as the
Recapitalization.
Upon completion of the Recapitalization, our authorized capital
stock will consist
of shares
of common stock, par value $0.01 per share, and
5,000,000 shares of undesignated preferred stock, par value
$0.01 per share. In connection with the Recapitalization, each
outstanding option to purchase Class A common stock or
Class B common stock and each outstanding warrant
exercisable for shares of Class A common stock will relate
to shares of our common stock and otherwise be adjusted
appropriately to give effect to the reverse stock split.
Additional
Information
The issuer of the common stock in this offering was originally
incorporated as a Delaware corporation in 2005. Our corporate
headquarters are located at 70 W. Madison Street,
Suite 1050, Chicago, Illinois 60602. Our telephone number
is
(312) 873-7500.
Our website address is www.trustwave.com. The information on our
website is not deemed, and you should not consider such
information, to be part of this prospectus.
5
THE
OFFERING
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Common stock offered |
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shares. |
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Common stock to be outstanding immediately after this
offering |
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shares. |
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Option to purchase additional shares |
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shares. |
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Use of proceeds |
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We estimate that the net proceeds from this offering will be
approximately $ million, or
approximately $ million if
the underwriters exercise their over-allotment option in full,
assuming an initial public offering price of
$ per share, which is the midpoint
of the price range set forth on the cover of this prospectus,
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us. We expect to use
substantially all of the net proceeds from this offering for
general corporate purposes. We have not allocated the net
proceeds from this offering for any specific purpose at this
time. See Use of Proceeds. |
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Risk factors |
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Investing in shares of our common stock involves a high degree
of risk. See Risk Factors beginning on page 11
of this prospectus for a discussion of factors you should
carefully consider before investing in shares of our common
stock. |
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Proposed stock exchange symbol |
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. |
Unless otherwise indicated, all information in this prospectus
relating to the number of shares of common stock outstanding
immediately after this offering:
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gives effect to the Recapitalization, including the conversion
of our outstanding Class A common stock, Class B
common stock and preferred stock into a single class of common
stock and the one-for- reverse
stock split;
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assumes the effectiveness of our amended and restated
certificate of incorporation and amended and restated bylaws;
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excludes:
(i) shares
of our common stock issuable upon the exercise of outstanding
stock options at a weighted average exercise price of
$ per share as of March 31,
2011; (ii) shares of our common stock issuable upon the
exercise of outstanding warrants at a weighted average exercise
price of $ per share as of
March 31, 2011; and (iii) an aggregate
of shares
of our common stock reserved for future grants under our 2001
Stock Incentive Plan and under our 2011 Cash and Equity
Incentive Plan, or the 2011 Incentive Plan, that we
intend to adopt in connection with this offering; and
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assumes: (i) no exercise by the underwriters of their
option to purchase up
to additional
shares from us; and (ii) an initial public offering price
of $ per share, which is the
midpoint of the initial public offering price range indicated on
the cover of this prospectus.
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6
SUMMARY
HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables summarize our financial data as of the
dates and for the periods indicated. We have derived the summary
consolidated financial data for the years ended
December 31, 2008, 2009 and 2010 from our audited
consolidated financial statements for such years and for the
three months ended March 31, 2010 and 2011 from our
unaudited consolidated financial statements for such periods.
Our audited consolidated financial statements as of
December 31, 2009 and 2010 and for the years ended
December 31, 2008, 2009 and 2010 have been included in this
prospectus. Our unaudited consolidated financial statements as
of March 31, 2011 and for the three months ended
March 31, 2010 and 2011 have been included in this
prospectus.
The unaudited pro forma as adjusted consolidated statement of
operations data set forth below for the year ended
December 31, 2010 gives effect to (i) the acquisitions
of Intellitactics, Inc. or Intellitactics, and
Breach Security, Inc., or Breach Security,
(ii) the Recapitalization, including the conversion of all
of the outstanding shares of our Class A common stock,
Class B common stock and preferred stock into a single
class of common stock and the
one-for- reverse
stock split, and (iii) our issuance and sale
of shares
of common stock in this offering at an assumed public offering
price of $ per share, which is the
midpoint of the price range listed on the cover page of this
prospectus, after deducting underwriting discounts and
commissions and estimated offering expense payable by us, as if
all such transactions had occurred on January 1, 2010. The
operating results for Intellitactics and Breach Security are
included in our statement of operations data for the year ended
December 31, 2010 from their acquisition dates of
March 1, 2010 and June 18, 2010, respectively. The
unaudited pro forma as adjusted consolidated statement of
operations data set forth below for the three months ended
March 31, 2011 gives effect to (i) the
Recapitalization, including the conversion of all of the
outstanding shares of our Class A common stock,
Class B common stock and preferred stock into a single
class of common stock and the
one-for- reverse stock split, and
(ii) our issuance and sale
of shares
of common stock in this offering at an assumed public offering
price of $ per share, which is the
midpoint of the price range listed on the cover page of this
prospectus, after deducting underwriting discounts and
commissions and estimated offering expense payable by us, as if
all such transactions had occurred on January 1, 2011.
The selected unaudited pro forma balance sheet data set forth
below as of March 31, 2011 gives effect to the
Recapitalization, including the conversion of all of the
outstanding shares of our Class A common stock,
Class B common stock and preferred stock into a single
class of common stock and the
one-for- reverse
stock split, and the selected unaudited pro forma as adjusted
balance sheet data set forth below as of March 31, 2011
also gives effect to our issuance and sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share,
which is the midpoint of the price range listed on the cover
page of this prospectus, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us,
in each case as if such transactions had occurred on such date.
The unaudited pro forma consolidated financial data is provided
for informational purposes only, does not necessarily present
our financial position or results of operations as they would
have been if the companies involved had constituted one entity
for the period presented and is not necessarily indicative of
our future results of operations or the results that might have
occurred if the forgoing transactions had been consummated on
the indicated date.
The summary historical and pro forma consolidated data presented
below should be read in conjunction with the sections entitled
Risk Factors, Unaudited Pro Forma Consolidated
Financial Data, Selected Historical Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and the related notes
thereto and other financial data included elsewhere in this
prospectus.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
as Adjusted
|
|
|
Actual
|
|
|
Actual
|
|
|
as Adjusted
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
44,356
|
|
|
$
|
56,708
|
|
|
$
|
81,677
|
|
|
$
|
|
|
|
$
|
16,829
|
|
|
$
|
23,448
|
|
|
$
|
|
|
Professional services
|
|
|
13,219
|
|
|
|
15,056
|
|
|
|
19,639
|
|
|
|
|
|
|
|
3,342
|
|
|
|
5,721
|
|
|
|
|
|
Product sales
|
|
|
753
|
|
|
|
1,343
|
|
|
|
10,187
|
|
|
|
|
|
|
|
1,518
|
|
|
|
2,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
58,328
|
|
|
|
73,107
|
|
|
|
111,503
|
|
|
|
|
|
|
|
21,689
|
|
|
|
31,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
|
22,525
|
|
|
|
26,431
|
|
|
|
33,415
|
|
|
|
|
|
|
|
7,406
|
|
|
|
9,363
|
|
|
|
|
|
Product sales, excluding depreciation and amortization
|
|
|
440
|
|
|
|
481
|
|
|
|
1,715
|
|
|
|
|
|
|
|
273
|
|
|
|
508
|
|
|
|
|
|
Depreciation and amortization
|
|
|
591
|
|
|
|
718
|
|
|
|
1,403
|
|
|
|
|
|
|
|
266
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
23,556
|
|
|
|
27,630
|
|
|
|
36,533
|
|
|
|
|
|
|
|
7,945
|
|
|
|
10,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
34,772
|
|
|
|
45,477
|
|
|
|
74,970
|
|
|
|
|
|
|
|
13,744
|
|
|
|
21,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
6,749
|
|
|
|
9,146
|
|
|
|
20,112
|
|
|
|
|
|
|
|
3,744
|
|
|
|
6,194
|
|
|
|
|
|
Sales and marketing
|
|
|
14,059
|
|
|
|
17,388
|
|
|
|
29,264
|
|
|
|
|
|
|
|
5,753
|
|
|
|
7,122
|
|
|
|
|
|
General and administrative
|
|
|
16,030
|
|
|
|
20,511
|
|
|
|
29,602
|
|
|
|
|
|
|
|
6,491
|
|
|
|
7,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
36,838
|
|
|
|
47,045
|
|
|
|
78,978
|
|
|
|
|
|
|
|
15,988
|
|
|
|
20,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,066
|
)
|
|
|
(1,568
|
)
|
|
|
(4,008
|
)
|
|
|
|
|
|
|
(2,244
|
)
|
|
|
759
|
|
|
|
|
|
Interest expense, net
|
|
|
(151
|
)
|
|
|
(112
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
(36
|
)
|
|
|
(8
|
)
|
|
|
|
|
Other income (loss), net
|
|
|
193
|
|
|
|
(304
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
(106
|
)
|
|
|
18
|
|
|
|
|
|
Gain on acquisition
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(2,024
|
)
|
|
|
(1,432
|
)
|
|
|
(4,250
|
)
|
|
|
|
|
|
|
(2,386
|
)
|
|
|
769
|
|
|
|
|
|
Income tax expense
|
|
|
(22
|
)
|
|
|
(114
|
)
|
|
|
(372
|
)
|
|
|
|
|
|
|
(78
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,046
|
)
|
|
$
|
(1,546
|
)
|
|
$
|
(4,622
|
)
|
|
$
|
|
|
|
$
|
(2,464
|
)
|
|
$
|
659
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative annual preferred
dividends(1)
|
|
$
|
(1,441
|
)
|
|
$
|
(1,800
|
)
|
|
$
|
(1,800
|
)
|
|
|
|
|
|
|
(450
|
)
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders
|
|
$
|
(3,487
|
)
|
|
$
|
(3,346
|
)
|
|
$
|
(6,422
|
)
|
|
|
|
|
|
$
|
(2,914
|
)
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
$
|
|
|
Diluted(2)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
$
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
|
69,100,346
|
|
|
|
71,339,985
|
|
|
|
86,721,283
|
|
|
|
|
|
|
|
79,317,662
|
|
|
|
91,783,570
|
|
|
|
|
|
Diluted(2)
|
|
|
69,100,346
|
|
|
|
71,339,985
|
|
|
|
86,721,283
|
|
|
|
|
|
|
|
79,317,662
|
|
|
|
98,215,085
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(3)
|
|
$
|
407
|
|
|
$
|
3,079
|
|
|
$
|
4,856
|
|
|
$
|
|
|
|
|
(610
|
)
|
|
|
2,537
|
|
|
$
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
671
|
|
|
|
20,943
|
|
|
|
(10,212
|
)
|
|
|
|
|
|
|
(5,495
|
)
|
|
|
4,646
|
|
|
|
|
|
Investing activities
|
|
|
(2,226
|
)
|
|
|
(2,292
|
)
|
|
|
8,581
|
|
|
|
|
|
|
|
2,410
|
|
|
|
(882
|
)
|
|
|
|
|
Financing activities
|
|
|
6,668
|
|
|
|
(1,165
|
)
|
|
|
(7,495
|
)
|
|
|
|
|
|
|
(6,375
|
)
|
|
|
190
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,136
|
|
|
|
3,012
|
|
|
|
4,970
|
|
|
|
|
|
|
|
1,021
|
|
|
|
1,517
|
|
|
|
|
|
Capital expenditures
|
|
|
1,786
|
|
|
|
2,743
|
|
|
|
4,273
|
|
|
|
|
|
|
|
333
|
|
|
|
882
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as Adjusted
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,492
|
|
|
$
|
|
|
|
$
|
|
|
Working
capital(4)
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
120,175
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible redeemable preferred
stock(5)
|
|
|
21,684
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
37,979
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the cumulative annual
dividends payable on our outstanding preferred stock. Such
dividends are payable only upon liquidation, dissolution or
winding up of the Company or when and if declared by our board
of directors. Our board of directors has not declared any
dividends on our preferred stock and all accumulated dividends
on such preferred stock will be extinguished in connection with
the Recapitalization. For additional information regarding the
terms of our existing preferred stock, see notes 13 and 14
to our audited consolidated financial statements for the years
ended December 31, 2008, 2009 and 2010 and notes 11
and 12 to our unaudited consolidated financial statements for
the three months ended March 31, 2010 and 2011 included
elsewhere in this prospectus.
|
|
|
|
(2)
|
|
Net (loss) income per common share
(basic and diluted) and the weighted average number of shares
used to compute net (loss) income per common share (basic and
diluted) for the years ended December 31, 2008, 2009 and
2010 and the three months ended March 31, 2010 and 2011 on
an actual basis have been calculated without giving effect to
the Recapitalization. Pro forma as adjusted net (loss) income
per common share (basic and diluted) and the weighted average
number of shares gives effect to the Recapitalization and
issuance and sale of shares in this offering.
|
|
|
|
(3)
|
|
We present Adjusted EBITDA, a
non-GAAP measure, in this prospectus to provide investors with a
supplemental measure of our operating performance. We believe
that Adjusted EBITDA is a useful performance measure and is used
by us to facilitate a comparison of our operating performance on
a consistent basis from
period-to-period
and to provide for a more complete understanding of factors and
trends affecting our business than GAAP measures can provide
alone. Our board of directors and management also use Adjusted
EBITDA as one of the primary methods for planning and
forecasting overall expectations and for evaluating on a
quarterly and annual basis actual results against such
expectations, and as a performance evaluation metric in
determining achievement of certain compensation programs and
plans for employees, including our senior executives.
|
|
|
|
We believe Adjusted EBITDA may be
useful to investors in comparing our operating performance
consistently over time as it removes from our operating results
the impact of our capital structure, asset base (primarily
depreciation and amortization), items outside the control of the
management team (such as taxes or changes in foreign currency
exchange rates) and other non-cash (purchase accounting
adjustments) or non-recurring items, including the impact of
non-cash stock-based compensation expense.
|
|
|
|
We define Adjusted EBITDA, a
non-GAAP financial measure, as net income (loss) before income
tax expense (benefit), depreciation and amortization, net
interest expense, stock-based compensation, gain (loss) on
foreign currency exchange, severance and transition costs, and
acquisition, transaction and integration expenses.
|
|
|
|
The use of Adjusted EBITDA has
limitations as an analytical tool and you should not consider
this performance measure in isolation from, or as an alternative
to, GAAP measures such as net income (loss). Adjusted EBITDA is
not a measure of liquidity under GAAP or otherwise, and is not
an alternative to cash flow from continuing operating
activities. The limitations of Adjusted EBITDA include:
(i) it does not reflect our cash expenditures or future
requirements for capital expenditures or contractual
commitments; (ii) it does not reflect changes in, or cash
requirements for, our working capital needs; (iii) it does
not reflect income tax payments we may be required to make; and
(iv) although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized often will
have to be replaced in the future, and Adjusted EBITDA does not
reflect any cash requirements for such replacements.
|
|
|
|
To properly and prudently evaluate
our business, we encourage you to review our audited
consolidated financial statements included elsewhere in this
prospectus and the reconciliation to Adjusted EBITDA from net
loss, the most directly comparable financial measure presented
in accordance with GAAP, set forth in the table below. All of
the items included in the reconciliation from net income to
Adjusted EBITDA are either (i) non-cash items or
(ii) items that management does not consider in assessing
our on-going operating performance. In the case of the non-cash
items, management believes that investors may find it useful to
assess our comparative operating performance because the
measures without such items are less susceptible to variances in
actual performance resulting from depreciation, amortization and
other non-cash charges and more reflective of other factors that
affect operating performance. In the case of the other items
that management does not consider in assessing our on-going
operating performance, management believes that investors may
find it useful to
|
(footnotes continued on
following page)
9
|
|
|
|
|
assess our operating performance if
the measures are presented without these items because their
financial impact may not reflect on-going operating performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
as Adjusted
|
|
|
Actual
|
|
|
Actual
|
|
|
as Adjusted
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Net (loss) income
|
|
$
|
(2,046
|
)
|
|
$
|
(1,546
|
)
|
|
$
|
(4,622
|
)
|
|
$
|
|
|
|
$
|
(2,464
|
)
|
|
$
|
659
|
|
|
|
|
|
Income tax expense
|
|
|
22
|
|
|
|
114
|
|
|
|
372
|
|
|
|
|
|
|
|
78
|
|
|
|
110
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,136
|
|
|
|
3,012
|
|
|
|
4,970
|
|
|
|
|
|
|
|
1,021
|
|
|
|
1,517
|
|
|
|
|
|
Interest expense, net
|
|
|
151
|
|
|
|
112
|
|
|
|
87
|
|
|
|
|
|
|
|
36
|
|
|
|
8
|
|
|
|
|
|
Stock-based compensation
expense(a)
|
|
|
285
|
|
|
|
278
|
|
|
|
1,026
|
|
|
|
|
|
|
|
137
|
|
|
|
293
|
|
|
|
|
|
(Gain) loss on foreign currency exchange
|
|
|
(178
|
)
|
|
|
259
|
|
|
|
232
|
|
|
|
|
|
|
|
84
|
|
|
|
(50
|
)
|
|
|
|
|
Severance and transition
costs(b)
|
|
|
|
|
|
|
948
|
|
|
|
1,268
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
Acquisition, transaction and integration
expenses(c)
|
|
|
37
|
|
|
|
(98
|
)
|
|
|
1,523
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
2,453
|
|
|
|
4,625
|
|
|
|
9,478
|
|
|
|
|
|
|
|
1,854
|
|
|
|
1,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
407
|
|
|
$
|
3,079
|
|
|
$
|
4,856
|
|
|
$
|
|
|
|
$
|
(610
|
)
|
|
$
|
2,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents non-cash compensation
expense.
|
|
|
(b)
|
Represents severance and transition
payments made to employees that were terminated as a result of
acquisitions and to certain members of our senior management
team whose positions were restructured in contemplation of this
offering.
|
|
|
(c)
|
Represents costs and expenses
associated with acquisitions, transactions and integration
activities during the period, including the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
as Adjusted
|
|
|
Actual
|
|
|
Actual
|
|
|
as Adjusted
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Acquisition
costs(i)
|
|
$
|
3
|
|
|
$
|
271
|
|
|
$
|
261
|
|
|
$
|
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
Transaction costs for potential
acquisitions(ii)
|
|
|
34
|
|
|
|
5
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial reporting costs for acquired
companies(iii)
|
|
|
|
|
|
|
113
|
|
|
|
195
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Lease
abandonment(iv)
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post acquisition purchase accounting
adjustments(v)
|
|
|
|
|
|
|
65
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on
acquisition(vi)
|
|
|
|
|
|
|
(552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition, transaction and integration expenses
|
|
$
|
37
|
|
|
$
|
(98
|
)
|
|
$
|
1,523
|
|
|
$
|
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Represents legal fees incurred in
connection with acquisitions during the period.
|
|
|
(ii)
|
Represents legal, accounting and
other consulting fees incurred in connection with transactions
that were not completed.
|
|
|
(iii)
|
Represents valuation services and
audits of acquired companies.
|
|
|
(iv)
|
Represents the lease abandonment
accrual for our facility in Carlsbad, California.
|
|
|
(v)
|
Represents certain adjustments
relating to the purchased assets and assumed liabilities of
Mirage Networks, Inc., BitArmor Systems, Inc. and Breach
Security, Inc. which we identified subsequent to finalizing the
purchase accounting for such acquisitions.
|
|
|
(vi)
|
Represents the gain on acquisition
of Mirage Networks, Inc.
|
|
|
|
(4)
|
|
Working capital is the amount by
which current assets exceed current liabilities.
|
|
(5)
|
|
Our
Series A-1
preferred stock and
Series A-2
preferred stock can be redeemed upon the written request of the
holders of two-thirds of our
Series A-1
preferred stock or
Series A-2
preferred stock, respectively, at an amount equal to their
respective liquidation preferences. Since this redemption
feature is not in our control, and does not have a date certain
or event certain redemption requirement, we have classified our
Series A-1
preferred stock and Series
A-2
preferred stock as temporary equity on our consolidated balance
sheet. For additional information regarding the terms of our
preferred stock, see note 14 to the notes to our
consolidated financial statements included elsewhere in this
prospectus.
|
10
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below,
together with the financial and other information contained in
this prospectus, before you decide to purchase shares of our
common stock. If any of the following risks actually occurs, our
business, financial condition, results of operations, cash flow
and prospects could be materially and adversely affected. As a
result, the trading price of our common stock could decline and
you could lose all or part of your investment in our common
stock. Before deciding whether to invest in our common stock,
you should also refer to the other information contained in this
prospectus, including our consolidated financial statements and
related notes.
Risks
Relating to Our Business
A
substantial portion of our revenue is derived from our solutions
that help organizations validate, achieve and maintain PCI
compliance and, as a result, our business and results of
operations could be materially adversely affected if PCI is
changed, cancelled, replaced or not enforced, new or different
technologies that minimize the need for PCI are widely adopted,
or we lose any of our PCI certifications.
We generate a majority of our revenues from our solutions that
help organizations achieve and maintain compliance with PCI, and
we expect that will continue for the foreseeable future. Our PCI
compliance solutions, including our TrustKeeper solution, are
based on the PCI security standards developed and maintained by
the PCI Security Standards Council, or the PCI
Council. The PCI Council may adopt significant changes to
PCI with little or no notice, including changes that could make
PCI more or less onerous for businesses. Governments may also
adopt laws or regulations that conflict with PCI. If we are
unable to timely adapt our compliance solutions to such changes,
our subscribers and members of our partner network may lose
confidence in our products and could switch to products offered
by our competitors. If security standards are changed in a
manner that makes them less onerous, our subscribers and members
of our partner network may view PCI compliance as less critical
to their businesses, and our partner network members may be less
aggressive in requiring validation with PCI and in recommending
our products to their customers.
Our growth strategy depends to a significant extent on our
ability to cross-sell our compliance enablement solutions to
subscribers who utilize our compliance management solutions. If
the PCI Council were to prohibit or limit us from cross-selling
our enablement solutions to subscribers who utilize our
compliance management solutions, we would be unable to pursue a
significant aspect of our growth strategy, which could have a
material adverse effect on our growth prospects and our results
of operations.
The introduction of products and services embodying new
technologies could render our existing products and services
obsolete and unmarketable. Other payment security technologies
exist or could be developed in the future, and our business
could be materially negatively affected if such technologies are
widely adopted. For example, businesses in the United Kingdom
utilize the chip and pin smartcard payment system in
which payment cards are embedded with a microchip and are
authenticated automatically using a personal identification
number. This technology has been adopted in other countries,
particularly in Europe, and we expect that this trend will
continue. Although we believe the chip and pin
technology does not replace or eliminate the need for our
compliance solutions, customers and potential customers may
nevertheless view our solutions as less critical to their
businesses. Other security technologies not based on PCI could
also be developed and adopted by businesses, which could result
in our customers switching to those alternative technologies. We
may not be able to successfully anticipate or adapt to changing
technology or customer requirements on a timely basis, or at
all. If we fail to keep up with technological changes or to
convince our customers and potential customers of the value of
our solutions even in light of new technologies, our business
and financial condition could be materially adversely affected.
In addition, domestic or international jurisdictions could adopt
new laws or regulations that conflict with or minimize the
importance of PCI. If we are unable to timely and effectively
respond to any changes in the laws or regulations governing data
security compliance, our business could be negatively affected.
Another important aspect of our growth strategy is the expansion
of our international operations. Although PCI applies globally,
compliance may be enforced less aggressively in international
jurisdictions as compared to the U.S. or businesses in
international jurisdictions may be less sensitive to data
security compliance. As a result, we
11
could expend considerable time and resources on our
international growth strategy without any assurances of success,
or our international sales may grow more slowly than we expect.
In addition, international jurisdictions may have laws or
regulations that conflict with PCI, and we may be unable to
adapt our solutions to such laws or regulations, which could
limit our opportunities for international expansion.
We also hold certain certifications under the requirements of
the PCI Council, including Qualified Security
Assessor, Approved Scanning Vendor and
Qualified PCI Forensic Investigator. If we were to
lose any or all of these certifications, whether due to changes
in PCI, the failure of our products to comply with PCI or for
any other reason, our ability to operate our business could be
materially adversely affected.
The
loss of a significant member or group of members of our partner
network, the failure to engage new partners or the decision by
one of our partners to use our products less or compete against
us, could materially adversely affect our operations and
sales.
We derive a substantial portion of our revenue from our
relationships with our partner network, which includes financial
institutions, payment service providers and other organizations
influential to the compliance and data security mandates of
their customers. While our partner network is comprised of
approximately 75 organizations, our five largest partner network
members accounted for 15.7% our of revenue during 2010, and one
member of our partner network, U.S. Bank, accounted for
10.0% of our revenue during 2010. Historically, members of our
partner network have also introduced or referred us to other
customer opportunities, the revenue from which we do not
attribute to such members. The amount of our revenue that we
derive from our partner network may be higher if these referrals
or indirect relationships are considered, but we are currently
unable to reliably attribute such revenue to particular members
of our partner network. For the foreseeable future, we expect to
continue to depend on a relatively small number of organizations
in our partner network for a significant percentage of our
revenue.
Our agreements with the members of our partner network are
non-exclusive, and if they choose to use our products less or
place greater emphasis on compliance solutions offered by our
competitors, or if they otherwise fail to enroll their customers
in our compliance solutions, our ability to grow our sales and
customer base may be adversely affected. The unforeseen loss of
one or more of our major partners, or the decision of one or
more of our major partners to emphasize our competitors
products or develop their own products, could seriously harm our
business.
In addition, our continued revenue growth will depend in part on
our ability to expand our partner network. Engaging new partners
requires the expenditure of a considerable amount of time and
resources by our management, sales force and other key
employees, and we cannot assure you that our efforts will prove
successful. To the extent we are unable to enter into
arrangements with new partners, our ability to sell our
solutions to new customers will be harmed, and our results of
operations and financial condition could be negatively affected.
If we
are unable to develop and maintain relationships with
businesses, government entities and other organizations within
our existing partner network that have not enrolled their
customers into TrustKeeper, or whose customers have enrolled but
have not become subscribers, our operating results may
decline.
Our growth strategy depends to a significant extent on our
ability to enroll our existing partner networks customers
into our TrustKeeper solution. We depend on our partners to help
us identify these potential enrollees, enroll them in
TrustKeeper and encourage them to become subscribers. We and our
partners may be unsuccessful in obtaining new enrollees or
converting enrollees to subscribers, which could negatively
affect our results of operations.
We
face intense competition in our market, both from larger,
better-known companies and from more targeted competitors; we
may lack sufficient financial or other resources to maintain or
improve our competitive position.
We compete with a large and broad array of established and
emerging compliance and data security vendors in a highly
fragmented and competitive environment. Our principal
competitors vary across our suite of data security solutions and
between our enterprise and small- and medium-sized business
customers. We principally compete
12
with hundreds of smaller, private companies and, to a lesser
extent, a more limited number of larger, more established
companies. A few of our larger competitors have a broad array of
compliance enablement solutions and other security software
products and may be able to offer products or functionality
similar to ours at a more attractive price by integrating or
bundling them more effectively than we can. Our competitors may
attempt to further expand their presence in the data security
compliance market and compete more directly against one or more
of our products, services or solutions.
Some of these existing and potential competitors may enjoy
competitive advantages such as:
|
|
|
|
|
greater name recognition and longer operating histories;
|
|
|
|
larger sales and marketing budgets and resources;
|
|
|
|
broader distribution and established relationships with network
partners and customers;
|
|
|
|
access to larger customer bases;
|
|
|
|
greater customer support resources;
|
|
|
|
greater resources to make acquisitions;
|
|
|
|
lower labor and development costs or increased economies of
scale; and
|
|
|
|
substantially greater financial, technical and other resources.
|
Some of our competitors have substantially larger installed
customer bases beyond the data security compliance market and
leverage their relationships based on other products, services
or solutions or incorporate data security functionality into
their existing products or services in a manner that may
discourage users from purchasing our products or solutions.
These larger competitors may also have more diversified
businesses that allow them to better withstand significant
reduction in capital spending by customers in a number of
markets.
Conditions in our markets could change rapidly and significantly
as a result of technological advancements or market
consolidation. Our current and potential competitors may also
establish cooperative relationships among themselves or with
third parties that may further enhance their resources and
product and services offerings in the markets we address. In
addition, current or potential competitors may be acquired by
third parties with greater available resources. As a result of
such acquisitions, our current or potential competitors might be
able to adapt more quickly to new technologies and customer
needs, devote greater resources to the promotion or sale of
their products and services, initiate or withstand substantial
price competition, and more readily develop and expand their
product and service offerings. These competitive pressures in
our market or our failure to compete effectively may adversely
affect our operating results and market share.
We may
not be able to compete effectively with companies that integrate
or bundle products similar to ours with their other product
offerings, and consolidation within our industry may heighten
this risk.
Many large, integrated software companies offer suites of
products that include software applications for security and
compliance management. In addition, hardware vendors, including
diversified, global concerns, offer products that address the
security and compliance needs of certain enterprises that
comprise our target market. Further, several companies currently
sell software products that our customers and potential
customers have broadly adopted, providing them a substantial
advantage when they sell products that perform functions
substantially similar to some of our products. Competitors that
offer a large array of security or software products may be able
to offer products or functionality similar to ours at a more
attractive price than we can by integrating or bundling them
with their other product offerings. Consolidation in our
industry increases the likelihood of competition based on
integration or bundling. Customers may also increasingly seek to
consolidate their enterprise-level software purchases with a
small number of larger companies that can purport to satisfy a
broad range of their requirements. If we are unable to
sufficiently differentiate our products from the integrated or
bundled products of our competitors, such as by offering
enhanced functionality, performance or value, we may see a
decrease in demand for our products, which would adversely
affect our business, operating results and financial condition.
Similarly, if customers seek to concentrate their software
purchases with a few large providers, we may be at a competitive
disadvantage.
13
Mergers, acquisitions or consolidations by and among actual and
potential competitors present heightened competitive challenges
to our business. The consolidation in our industry increases the
likelihood of competition based on integration or bundling,
particularly where competitors products and offerings are
effectively integrated, and we believe that consolidation in our
industry may increase the competitive pressures we face on all
our products. If we are unable to sufficiently differentiate our
products from the integrated or bundled products of our
competitors, such as by offering enhanced functionality,
performance or value, we may see a decrease in demand for those
products, which would adversely affect our business, operating
results and financial condition. Further, it is possible that
continued industry consolidation may impact customers
perceptions of the viability of smaller or even medium-sized
firms and consequently customers willingness to purchase
from such firms. Similarly, if customers seek to concentrate
their software purchases in the product portfolios of a few
large providers, we may be at a competitive disadvantage
notwithstanding the superior performance that we believe our
products can deliver.
If we
are not successful in executing our strategy to increase our
sales to larger enterprises, our results of operations may
suffer.
Part of our growth strategy is to increase sales of our
compliance solutions to enterprise customers. Sales to
enterprise customers involve risks that may not be present, or
that are present to a lesser extent, with sales to small- and
medium-sized organizations. These risks include:
|
|
|
|
|
increased competition from larger competitors that traditionally
target enterprises, service providers and government entities
and that may already have purchase commitments from those
customers;
|
|
|
|
increased purchasing power and leverage held by large customers
in negotiating contractual arrangements with us;
|
|
|
|
more stringent requirements in our support service contracts,
including stricter support response times, and increased
penalties for any failure to meet support requirements; and
|
|
|
|
longer sales cycles and the associated risk that substantial
time and resources may be spent on a potential customer who
elects not to purchase our products and services.
|
Large enterprises often undertake a significant evaluation
process that results in a lengthy sales cycle. We may spend
substantial time, effort and money in our sales efforts without
being successful in producing any sales. In addition, product
and service purchases by enterprises are frequently subject to
budget constraints, multiple approvals, and unplanned
administrative, processing and other delays. Finally,
enterprises typically have longer implementation cycles, require
greater product functionality and scalability and a broader
range of services (including design services), demand that
vendors such as us take on a larger share of risks, sometimes
require acceptance provisions that can lead to a delay in
revenue recognition and expect greater payment flexibility. All
of these factors can add further risk to business conducted with
these customers. If sales expected from a large customer for a
particular quarter are not realized in that quarter or at all,
our business, operating results and financial condition could be
materially adversely affected.
Our
efforts to expand our product and service offerings beyond the
PCI market may not succeed.
One aspect of our growth strategy is the expansion of our
partner network in health care and government services in order
to facilitate the distribution of solutions that address
regulations and standards other than PCI, such as HIPAA and
FISMA. Although some of our products that are designed to
address compliance with PCI can also be utilized by our
customers to address certain requirements of other regulations
and standards such as HIPAA and FISMA, to date we have not
developed any products solely designed for such use. Our
experience with compliance solutions for such regulations and
standards is limited. This strategy will likely require us to
invest a significant amount of time and resources with no
assurances of success. We believe that our cash and cash
equivalents together with cash flows from operations will be
sufficient to meet our contemplated capital expenditures in this
regard. Our product and service offerings for non-PCI markets
may not be adopted by potential customers or may otherwise fail
to achieve commercial success. In addition, we may be unable to
develop a partner network for these solutions similar to the
network we have developed for our PCI compliance solutions. If
we are not successful in executing on
14
this aspect of our growth strategy, our business, operating
results and financial condition could be materially adversely
affected.
Defects
or vulnerabilities in our products or services or the failure of
our products to adequately prevent a data security breach or
protect data assets could harm our reputation and sales of our
products and services and expose us to liability for
losses.
Because our products are complex, undetected errors, failures or
bugs may occur, especially when products are first introduced or
when new versions are released despite our efforts to test those
products and enhancements prior to release. Defects, errors or
vulnerabilities may make our products susceptible to hacking or
electronic break-ins or otherwise cause them to fail to help
secure data. Any such failures may temporarily or permanently
expose our customers data, leaving their data unprotected
against the latest security threats. We may not be able to
correct defects, errors, vulnerabilities or failures promptly,
or at all.
In addition, our products or services could be perceived to be
ineffective for a variety of reasons outside of our control.
Hackers could circumvent our customers security measures,
and customers may misuse our products resulting in a security
breach or perceived product failure. We provide an
enterprise-grade security compliance solution that integrates
with a variety of other elements in a customers IT and
security infrastructure, and we may receive blame for a security
breach that was the result of the failure of one of the other
elements. The occurrence of a breach, whether or not caused by
our products, could delay or reduce market acceptance of our
products, and have an adverse effect on our business and
financial performance, and any necessary revisions to our
products may cause us to incur significant expenses.
Any defects, errors, vulnerabilities or failures in our products
or services could result in:
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expenditure of significant financial and product development
resources in efforts to analyze, correct, eliminate or
work-around errors or defects or to address and eliminate
vulnerabilities;
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loss of existing or potential partners or customers;
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loss or disclosure of confidential information or our
proprietary technology;
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delayed or lost revenue;
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delay or failure to attain market acceptance;
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lost market share;
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negative publicity, which will harm our reputation; and
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litigation, regulatory inquiries or investigations that may be
costly and harm our reputation.
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In addition, an actual or perceived security breach of the data
of one of our customers or our own systems, regardless of
whether the breach is attributable to the failure of our
products to prevent the security breach, could adversely affect
the markets and our customers perception of us as a
leading data security compliance company or of our security
products and services. Such an occurrence could result in
negative press coverage and negatively affect our reputation.
Any reputational harm to our company or our brand, or to any of
our security products and services, may result in the loss of
existing customers or make it more difficult for us to engage
new customers.
With respect to enterprise customers, our qualified security
assessors could also unintentionally provide erroneous
compliance validations. If that were to occur, we could be
exposed to liability, suffer reputational damage or, if we do
not timely rectify the issue, be placed on a remediation list by
PCI or lose or Qualified Security Assessor certification.
Although we have limitation of liability provisions in our
standard terms and conditions of sale, they may not fully or
effectively protect us from claims as a result of federal, state
or local laws or ordinances or unfavorable judicial decisions in
the United States or other countries. In addition, some of our
customer agreements may require us to indemnify our customers
for any claims or losses resulting from defects, errors or
vulnerabilities in, or infringement by, our products. The sale
and support of our products also entail the risk of product
liability claims. We maintain insurance to protect against
certain claims associated with the use of our products, but our
insurance
15
coverage may not adequately cover any claim asserted against us.
In addition, even claims that ultimately are unsuccessful could
result in our expenditure of funds in litigation and divert
managements time and other resources.
If we
fail to timely update our products in response to new security
threats or to detect security attacks, our customers
systems and data could be compromised.
The threats facing our customers are constantly evolving and the
techniques used by attackers to access or sabotage data change
frequently. Our signature operations team develops signatures
for new and emerging malicious code and malware. When
incorporated into certain of our products, the signatures
identify malicious code or malware and prevent the threat from
affecting our customers systems and data. If we fail to
timely update signatures, such that new or modified malicious
code or malware are not detected by our products, our customers
who utilize those products may suffer a data security breach,
which could cause damage to their network and systems and loss
of their data.
In addition, our teams that support our compliance enablement
solutions provide real-time threat monitoring and detection for
our customers. If we fail to discover a security attack against
a customer, whether due to defects or vulnerabilities in our
systems or our failure to timely update our threat protection
systems in response to new threats, or fail to notify a customer
of an attack, such customers network could be compromised,
potentially resulting in damage to their network and systems and
loss of their data.
Any such security incidents could result in the loss of
customers or partners and harm our brand and reputation, which
could have a material adverse effect on our business and results
of operations.
If our
internal network system is compromised by computer hackers,
public perception of our security products and services will be
harmed.
We will not succeed unless the marketplace is confident that we
provide effective security protection. Because we provide
security products, we may be a more attractive target for
attacks by computer hackers. If an actual or perceived breach of
network security occurs in our internal systems, it could
adversely affect the market perception of our products and
services, and may expose us to the loss of information,
litigation and possible liability. In addition, such a security
breach could impair our ability to operate our business,
including our ability to provide support services to our
customers. If this happens, our revenue could decline and our
business could suffer.
Damage
or disruptions to our facilities, including our corporate
headquarters and third-party data center hosting facility, could
impair the delivery of our products and services and materially
adversely affect our business, operating results and financial
condition.
Most of our sales, finance and administrative operations, and a
portion of our development operations, are conducted at our
corporate headquarters in Chicago, Illinois. Although we take
precautions to safeguard our Chicago facility, including through
physical security measures, insurance, security procedures,
health and safety protocols and off-site back up of computer
data, any loss of or damage or disruption to this facility could
harm our ability to timely and effectively meet our
customers data security compliance requirements, which in
turn could materially adversely affect our business, operating
results and financial condition.
In addition, we currently serve a substantial portion of our
customers from a third-party data center hosting facility. As
part of our current disaster recovery arrangements, our
production environment and all of our business critical data is
replicated in near real-time to our secondary data center in our
corporate headquarters. Any damage to, or failure of, our data
center hosting facility or recovery facility could result in
interruptions in our products and services. As we add data
centers and add capacity in our existing primary data center, we
may move or transfer our data and our customers data.
Despite precautions taken during this process, any unsuccessful
data transfers may impair the delivery of our service.
Interruptions in our service may reduce our revenue and harm our
ability to attract new customers. Our business will also be
harmed if our customers and potential customers believe our
service is unreliable. Despite precautions taken at our
third-party data center hosting facility, the occurrence of a
natural disaster or an act of terrorism, a decision to close the
facility without adequate notice or other unanticipated problems
at that facility could result in lengthy interruptions in our
service.
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We
cannot be certain that our development activities will be
successful or will not incur delays or cost
overruns.
While our management team is committed to enhancing our current
product and services offerings and introducing innovative new
products and services, we cannot be certain that our development
activities will be successful or that we will not incur delays
or cost overruns. Furthermore, we may not have sufficient
financial resources to identify and develop new technologies and
bring product enhancements or new products and services to
market in a timely and cost effective manner. New technologies
and product enhancements could be delayed or cost more than we
expect, and we cannot ensure that any such products or services
will be commercially successful if and when they are introduced.
The
data security compliance industry is rapidly evolving and the
complex technology integrated in our products makes them
difficult to develop. If we do not accurately predict, prepare
for and respond promptly to technological and market
developments and changing customer needs and develop
corresponding products, our competitive position and prospects
will be harmed.
Our future success depends on our ability to respond to the
rapidly changing needs of our customers by developing or
introducing new products, product upgrades, services and
solutions in a timely manner. We have in the past incurred, and
will continue to incur, development expenses as we strive to
remain competitive. New product development and introduction
involves a significant commitment of time and resources and is
subject to a number of risks and challenges including:
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managing the length of the development cycle for new products
and product enhancements;
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adapting to emerging and evolving industry standards and to
technological developments by our competitors and customers;
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entering into new or unproven markets with which we have limited
experience;
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managing new product and service strategies;
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integrating acquired products and technologies;
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trade compliance issues affecting our ability to ship new or
acquired products;
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protecting our intellectual property and other proprietary
rights;
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developing or expanding efficient sales channels and
partners; and
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obtaining sufficient licenses to technology and technical access
from operating system software vendors on reasonable terms to
enable the development and deployment of interoperable products,
including source code licenses for certain products with deep
technical integration into operating systems.
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In addition, the data security compliance industry is expected
to continue to evolve rapidly. Many of our customers operate in
dynamic and rapidly changing markets that require them to
continuously evolve their IT infrastructure, including adding
numerous network access points and adapting increasingly complex
enterprise networks, integrating a variety of hardware, software
applications, operating systems and networking protocols. In
addition to the rapidly changing network environments, computer
hackers and others who try to attack networks are employing
increasingly sophisticated techniques to gain access to and
attack systems and networks. In order to remain competitive, we
need to accurately anticipate changes in IT infrastructure that
our customers will deploy, the security vulnerabilities of such
infrastructure as well as likely attack techniques, and to
continue to develop and introduce solutions that successfully
address the evolving threats while minimizing the impact on IT
infrastructure performance.
Although the market expects rapid development and commercial
introduction of new products or product enhancements to respond
to changing infrastructure and evolving threats, the development
of these products is difficult and the timeline for their
release and availability can be uncertain. We have in the past
and may in the future experience unanticipated delays in the
availability of new products and services and fail to meet
previously announced timetables for such availability. If we do
not quickly respond to the rapidly changing and rigorous needs
17
of our customers by timely developing and releasing new products
and services or enhancements that can respond adequately to new
security threats, our competitive position and business
prospects could be materially harmed.
If our
new products and product enhancements do not achieve sufficient
market acceptance, our results of operations and competitive
position will suffer.
We spend substantial amounts of time and money to develop new
products or enhanced versions of our existing products to
integrate additional features, improved functionality or other
enhancements in order to meet our customers rapidly
evolving demands for data security compliance in our highly
competitive industry. When we develop a new product or an
enhanced version of an existing product, we typically incur
expenses and expend resources upfront to market, promote and
sell the new offering. Therefore, when we develop and introduce
new or enhanced products, they must achieve high levels of
market acceptance in order to justify the amount of our
investment in developing and bringing them to market.
Our new products or product enhancements could fail to attain
sufficient market acceptance for many reasons, including:
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delays in releasing our new products or enhancements to the
market;
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failure to accurately predict changes in the laws, regulations
and industry standards applicable to digital data, particularly
payment card processing data;
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failure to adapt the functionality of our products in a timely
fashion in response to changes in laws, regulations and industry
standards;
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inability to interoperate effectively with the networks or
applications of our prospective customers;
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inability to protect against new types of attacks or techniques
used by hackers;
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defects, errors or failures;
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negative publicity about their performance or effectiveness;
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introduction or anticipated introduction of competing products
by our competitors;
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easing of regulatory requirements around security; and
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reluctance of customers to purchase products incorporating open
source software.
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If our new products or enhancements do not achieve adequate
acceptance in the market, our competitive position will be
impaired, our revenue will be diminished and the effect on our
operating results may be particularly acute because of the
significant research, development, marketing, sales and other
expenses we incurred in connection with the new product or
enhancement.
If we
fail to effectively manage our growth, our business and
operating results could be harmed.
We have experienced, and we expect to continue to experience,
rapid growth in our operations, which will continue to place
significant demands on our management, employees and operational
and financial infrastructure. As we continue to grow, we must
effectively integrate, develop and motivate a large number of
new employees, and we must maintain the beneficial aspects of
our corporate culture. In particular, we intend to continue to
make substantial investments to expand our product development,
sales and general and administrative organizations, and our
international operations. To attract top talent, we have had to
offer, and believe we will need to continue to offer, highly
competitive compensation packages. The risks of over-hiring or
over-compensating and the challenges of integrating a rapidly
growing employee base into our corporate culture may be
exacerbated by our international expansion. Additionally, we may
not be able to hire new employees, particularly product
development specialists and sales personnel, quickly enough to
meet our needs. If we fail to effectively manage our hiring
needs and successfully integrate our new hires, our efficiency
and ability to meet our forecasts and our employee morale,
productivity and retention could suffer, and our business and
operating results could be adversely affected.
18
Additionally, if we do not effectively manage the growth of our
business and operations, the quality and effectiveness of our
solutions could suffer, which could negatively affect our brand,
operating results and overall business. To effectively manage
this growth, we will need to continue to improve our
operational, financial and management controls, and our
reporting systems and procedures by, among other things:
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improving our IT infrastructure to maintain the effectiveness of
our solutions;
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enhancing our internal controls to ensure timely and accurate
reporting of all of our operations; and
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appropriately documenting our IT systems and our business
processes.
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These systems enhancements and improvements will require
significant capital expenditures and allocation of management
and employee resources, and there are no assurances that any
enhancements or improvements will be sufficient to keep up with
our growth. If we fail to implement these enhancements and
improvements effectively, our ability to manage our expected
growth and comply with the rules and regulations that are
applicable to public companies will be impaired.
We do
not expect that our revenue growth will continue at historical
rates.
Over the last five years, our net revenue has grown at a
compound annual growth rate of 43% and, for the year ended
December 31, 2010, we reported total revenue of
$111.5 million, representing an increase of 53% and 91% as
compared to the years ended December 31, 2009 and
December 31, 2008, respectively. Although we believe our
revenue will continue to increase in the near term as we
implement our growth strategy and benefit from the increasing
demand for data security compliance solutions and the key
differentiators of our solutions, we do not expect that our
revenue growth will continue at these historical rates due, in
part, to the increasing size of our revenue base that will be
used for comparison purposes. In addition, our expectation that
our revenue will continue to increase in the near term is based
on a number of important assumptions and subject to a number of
risks and uncertainties, many of which are outside of our
control. As a result, we cannot provide any assurances that such
assumptions will ultimately turn out to be correct and that our
revenue will continue to increase in the near term, either on a
year-over-year
or a sequential quarterly basis.
We
have a history of losses, and we are unable to predict the
extent of any future losses or when, if ever, we will achieve
profitability in the future.
We have incurred net losses in recent years, including net
losses of $1.5 million in 2009 and $4.6 million in
2010. As a result, we had an accumulated deficit of
$24.1 million at December 31, 2010. Although we have
been profitable in certain periods in the past and in the first
quarter of 2011, we may not be able to achieve or sustain
profitability in future periods. Achieving profitability will
require us to increase revenue, manage our cost structure,
including the borrowing costs on our debt, and not experience
unanticipated liabilities. Revenue growth may slow or revenue
may decline for a number of possible reasons, including slowing
demand for our products or services, increasing competition, a
decrease in the growth of our overall market, or if we fail for
any reason to continue to capitalize on growth opportunities.
Any failure by us to obtain and sustain profitability, or to
continue our revenue growth, could cause the price of our common
stock to decline significantly.
The
market for on-demand applications may develop more slowly than
we expect.
The market for on-demand application products is not as mature
as the market for packaged software, and it is uncertain whether
these products will achieve and sustain high levels of demand
and market acceptance. Our success will depend, to a large
extent, on the willingness of businesses, large and small, to
accept and increase their use of on-demand data security
compliance solutions. Many larger enterprises may have invested
substantial effort and financial resources to integrate
traditional enterprise software into their businesses and may be
reluctant or unwilling to switch to a different solution or to
migrate these applications to on-demand services. Furthermore,
some enterprises may be reluctant or unwilling to use enterprise
on-demand application services because they have concerns
regarding the risks associated with security capabilities, among
other things, of the technology delivery model associated with
these products. If enterprises do not perceive the benefits of
enterprise on-demand application products, then the market for
these products may not develop at all, or it may develop more
slowly
19
than we expect, either of which would significantly adversely
affect our operating results. In addition, we may make errors in
predicting and reacting to relevant business trends, which could
harm our business. The market for our solutions may not develop
further, or may develop more slowly than we expect, either of
which would harm our business.
If we
are unable to hire, retain and motivate qualified personnel, our
business will suffer.
Our future success depends, in part, on our ability to continue
to attract and retain highly skilled personnel. The loss of the
services of any of our key personnel, the inability to attract
or retain qualified personnel, or delays in hiring required
personnel, particularly in product development and sales, may
seriously harm our business, financial condition and results of
operations. None of our key employees has an employment
agreement for a specific term, and any of our employees may
terminate their employment at any time. Our ability to continue
to attract and retain highly skilled personnel will be critical
to our future success. Competition for highly skilled personnel
is frequently intense and we may not be successful in
attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs.
Our
ability to operate our business effectively could be impaired if
we fail to retain our senior management.
Our future performance depends on the continued services and
continuing contributions of our senior management to execute on
our business plan, and to identify and pursue new opportunities
and product innovations. Our management team has significant
industry experience and would be difficult to replace. These
individuals possess sales, marketing, product development,
technical, financial and administrative skills and relationships
that are critical to the operation of our business. The loss of
any of our senior managers could significantly delay or prevent
the achievement of our development and strategic objectives. In
addition, members of our senior management may be distracted by
activities unrelated to our business. The loss of the services,
or distraction, of our senior management for any reason could
adversely affect our business, financial condition and results
of operations.
We
face numerous risks relating to the protection and
enforceability of our intellectual property rights and our use
of third-party intellectual property, many of which could result
in the loss of our intellectual property rights as well as other
material adverse impacts on our business and financial results
and condition.
We rely on a combination of contractual rights, trademarks,
trade secrets, patents and copyrights to establish and protect
our intellectual property rights in our technology and products.
However, despite these measures, our intellectual property
rights could be challenged, invalidated, circumvented or
misappropriated. Competitors may independently develop
technologies or products that are substantially equivalent or
superior to our products or that inappropriately incorporate our
proprietary technology into their products. Competitors may hire
our former employees who may misappropriate our proprietary
technology. Certain jurisdictions may not provide adequate legal
infrastructure for effective protection of our intellectual
property rights. Changing legal interpretations of liability for
unauthorized use of our technologies or products or lessened
sensitivity by corporate, government or institutional users to
refraining from intellectual property piracy or other
infringements of intellectual property could also harm our
business. We also rely on key technologies developed or licensed
by third parties, and we may not be able to obtain or renew such
licenses from these third parties at all or on reasonable terms.
With respect to some of our proprietary technologies, we have
filed patent applications and obtained patents to protect our
intellectual property rights in these technologies as well as
the interests of our licensees. There can be no assurance that
our patent applications will be approved, that any patents
issued will adequately protect our intellectual property rights,
or that such patents will not be challenged by third parties or
found by a judicial authority to be invalid or unenforceable.
We rely on several registered and unregistered trademarks to
protect our brand. Third parties may use trademarks similar to
our trademarks in different fields of use and any potential
confusion as to the source of goods or services could have a
material adverse effect on our business, financial condition and
results of operation.
20
Litigation
may be necessary to enforce and protect our trade secrets,
patents and other intellectual property rights. Similarly, we
may be required to defend against claimed
infringement.
In order to enforce and protect our intellectual property
rights, it may be necessary for us to initiate litigation
against third parties, such as patent infringement suits or
interference proceedings. Any lawsuits that we initiate could be
expensive, take significant time and divert managements
attention from other business concerns. Litigation also puts our
patents at risk of being invalidated or interpreted narrowly and
our patent applications at risk of not issuing. Additionally, we
may provoke third parties to assert counterclaims against us. We
may not prevail in any lawsuits that we initiate and the damages
or other remedies awarded, if any, may not be commercially
valuable. The occurrence of any of these events may adversely
affect our financial condition and results of operations.
Some of our products have been, and in the future could be,
alleged to infringe existing intellectual property rights of
third parties. Even if we believe that such claims are without
merit, we cannot be certain that we will prevail in any
intellectual property dispute.
The costs of defending litigation, and engaging in intellectual
property litigation generally, may be substantial regardless of
the merit of the claim or the outcome. Defending such
intellectual property litigation can also distract
managements attention and resources. Successfully
prosecuted claims of intellectual property infringement against
us might also cause us to lose our proprietary rights, prevent
us from developing or selling our products, redesign affected
products, require us to enter into costly settlement agreements
or to obtain licenses to patents or other intellectual property
rights that our products are alleged to infringe. Such licenses
may not be available on reasonable commercial terms, or at all.
The data security industry has increasingly been subject to
patent and other intellectual property rights litigation,
particularly from special purpose or so-called
non-practicing entities that seek to monetize their
intellectual property rights by asserting claims against others.
We expect this trend to continue and, as we become a larger and
more visible company, we expect this trend may accelerate with
respect to us specifically. The litigation process is costly and
subject to inherent uncertainties, and we may not prevail in
litigation matters regardless of the merits of our position.
In addition, because we incorporate technology from third
parties in our products, our exposure to infringement actions
may increase because we must rely upon these third parties to
verify the origin and ownership of such technology. Even if we
have an agreement for such a third party to indemnify us against
such costs, the indemnifying party may be unable to uphold its
contractual obligations. If we cannot or do not license the
infringed technology at all or on reasonable terms, or
substitute similar technology from another source, our business
and results of operations could be adversely impacted.
If we
are unable to protect the confidentiality of our proprietary
information and know-how, the value of our products could be
adversely affected.
In addition to patented technology, we rely on our unpatented
proprietary technology, trade secrets, processes and know-how.
We generally seek to protect this information by
confidentiality, non-disclosure and assignment of invention
agreements with our employees, consultants and third parties.
However, these agreements may be inadequate to protect our
proprietary information and intellectual property rights.
Moreover, those agreements may be breached and we may not have
adequate remedies for any such breach. In addition, our trade
secrets may be disclosed to or otherwise become known or be
independently developed by competitors. To the extent that our
employees, consultants or contractors use intellectual property
owned by others in their work for us, disputes may arise as to
the rights in related or resulting know-how and inventions. If
we are unable to maintain the proprietary nature of our
technologies, our business could be materially adversely
affected.
Some
of our products contain open source software, and
any failure to comply with the terms of one or more of these
open source licenses could adversely affect our
business.
Certain of our products are distributed with software licensed
by its authors or other third parties under open
source licenses. Some of these licenses contain
requirements that we make available our proprietary source code
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for modifications or derivative works we create based upon the
open source software, and that we license such modifications or
derivative works under the terms of a particular open source
license or other license granting third parties certain rights
of further use. If we combine our proprietary software with open
source software in a certain manner, we could, under certain of
the open source licenses, be required to release the source code
of our proprietary software. In addition to risks related to
license requirements, usage of open source software can lead to
greater risks than use of third party commercial software, as
open source licensors generally do not provide warranties or
controls on origin of the software. We have established
processes to help alleviate these risks, including a review
process for screening requests from our development
organizations for the use of open source, but we cannot be sure
that all open source is submitted for approval prior to use in
our products. In addition, many of the risks associated with
usage of open source cannot be eliminated, as use of open source
in our products could inadvertently occur, in part because open
source license terms are often ambiguous. Companies that
incorporate open source software into their products have, in
the past, faced claims seeking enforcement of open source
license provisions and claims asserting ownership of open source
software incorporated into their products. Defending such claims
or being required to disclose or make available our proprietary
source code pursuant to an open source license could materially
adversely affect our business.
We may
be subject to claims that our employees or we have inadvertently
or otherwise used or disclosed alleged trade secrets or other
proprietary information of former employers of our
employees.
We employ individuals who were previously employed at other
technology companies, including our competitors or potential
competitors. Therefore, we face exposure to infringement actions
if those employees inadvertently or deliberately incorporate
proprietary technology of our competitors into our products
despite efforts by our competitors and us to prevent such
misuse. Litigation may be necessary to defend against such
claims, which could be costly and divert managements
attention. If any such claims are successfully asserted against
us, we could be required to pay substantial damages or could be
prevented from selling some or all of our products. If we are
prevented from selling some or all of our products, our business
and results of operations would be materially adversely affected.
We may
be exposed to certain claims and liabilities if a consumer
suffers a loss resulting from a data security breach involving a
subscriber who displays our Trustwave Trusted Commerce
Seal or if a consumer misinterprets our
seal.
Our subscribers who maintain a website which accepts payment
cards are permitted to display our Trustwave Trusted Commerce
seal on their website. Displaying the seal is not meant to
convey that the subscriber is PCI compliant; rather, the
Trustwave Trusted Commerce seal directs the website user to
click on the seal in order to obtain more information about
steps that the subscriber has taken, if any, to validate
compliance with PCI. Although the Trustwave Trusted Commerce
seal contains a limitation of liability disclaimer, that
disclaimer may not fully or effectively protect us from claims
if a consumer relies on the seal in connection with a
transaction and subsequently suffers a loss that results from a
data security breach involving the subscriber. Furthermore, we
could be subject to claims if a consumer misinterprets the
display of the seal on a subscribers website to mean that
the subscriber is PCI compliant. Any such claims could divert
our managements attention, require us to expend
considerable resources in defending against such claims or
otherwise materially harm our reputation, business, results of
operations or financial condition.
We
face a number of risks associated with our international revenue
and operations, any or all of which could result in a disruption
in our business and a decrease in our revenue.
During each of 2009 and 2010, 15% of our revenue was generated
outside of North America. In that regard, we generated a
significant amount of this revenue from sales into the United
Kingdom, Sweden, Brazil, South Africa and Australia. We plan to
expand our international operations, but such expansion is
contingent upon the financial performance of our existing
international operations as well as our identification of growth
opportunities. Our revenue from international sales may
fluctuate significantly or grow at a slower pace than we expect
due to less enforcement of PCI in international markets or the
use of other payment security technologies, for example, the
chip and pin smartcard payment system in the United
Kingdom.
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As of March 31, 2011, we served customers in approximately
65 countries. Our international operations and expansion plans
are subject to risks not typically associated with our domestic
operations, including:
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potential loss of proprietary information due to
misappropriation or laws that may be less protective of our
intellectual property rights than U.S. laws or may not be
adequately enforced;
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multiple, conflicting and changing governmental laws and
regulations, including employment, tax, privacy and data
protection laws and regulations;
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regulations or restrictions on the use, import, or export of
encryption technologies that could delay or prevent the
acceptance and use of encryption products and public networks
for secure communications;
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fluctuations in currency exchange rates and economic instability
such as higher interest rates in the U.S. and inflation;
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difficulties and costs of staffing and managing international
operations;
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potentially adverse tax consequences;
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wage and price controls;
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differing technology standards;
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reduced sales due to the failure to obtain any required export
approval of our technologies, particularly our encryption
technologies;
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costs and delays associated with developing software and
providing support in multiple languages; and
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political and social unrest, war or terrorism.
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In addition, if we become unable to obtain foreign regulatory
approvals on a timely basis, our business in the affected
countries would no longer exist and our revenue could decrease
significantly. Certain of our products are subject to export
controls under U.S. law. The list of products and countries
for which export approval is required, and the regulatory
policies with respect thereto, may be revised from time to time
and our inability to obtain required approvals under these
regulations could materially and adversely affect our ability to
make international sales.
We are subject to foreign exchange risks because the majority of
our costs are denominated in U.S. dollars, whereas a
significant portion of the sales and expenses of our
international operations are denominated in various foreign
currencies. A decrease in the value of any of these foreign
currencies relative to the U.S. dollar could affect the
profitability in U.S. dollars of our products sold in these
markets. We do not currently hold forward exchange contracts to
exchange foreign currencies for U.S. dollars to offset
currency rate fluctuations.
We
have a large amount of goodwill and other intangible assets and
our earnings will be harmed if we suffer an impairment of our
goodwill or other intangible assets.
We have a large amount of goodwill and other intangible assets
and are required to perform an annual assessment for possible
impairment for accounting purposes. At March 31, 2011, we
had goodwill of $42.6 million and intangible assets of
$16.8 million. If we do not achieve our planned operating
results or other factors impair these assets, we may be required
to incur a non-cash impairment charge. Any impairment charges in
the future will adversely affect our results of operations or
financial condition. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Estimates-Goodwill,
Intangible Assets and Business Combinations.
Our
ability to sell our products is dependent in part on the quality
of our technical support services, and our failure to offer high
quality technical support services would have a material adverse
effect on our sales and results of operations.
Our customers depend on our technical support services to
resolve any issues relating to our products. If we do not
effectively assist our customers with resolving questions or
issues relating to our products and provide effective
23
ongoing support, our ability to sell additional products and
services to existing customers would be adversely affected and
our reputation with potential customers could be damaged. Many
enterprise customers require higher levels of support than
small-or
medium-sized businesses. If we fail to meet the requirements of
enterprise customers, it may be more difficult to execute on our
strategy to increase our penetration with such customers.
We
rely significantly on revenue from subscriptions which may
decline, and, because we generally recognize revenue from
subscriptions over the term of the relevant service period,
downturns or upturns in sales are not immediately reflected in
full in our operating results.
Subscription revenue accounts for a significant portion of our
revenue, comprising 76%, 78% and 73% of our total revenue in the
years ended December 31, 2008, 2009 and 2010, respectively.
Sales of new or renewal subscription contracts may decline and
fluctuate as a result of a number of factors, including
subscribers level of satisfaction with our products and
services, the prices of our products and services, the prices of
products and services offered by our competitors or reductions
in our subscribers spending levels. If our sales of new or
renewal subscription contracts decline, our revenue and revenue
growth may decline and our business will suffer. In addition we
recognize subscription revenue monthly over the term of the
relevant subscription period, which is typically one year
but has been as long as five years. As a result, a certain
amount of the revenue we report each quarter is the recognition
of deferred revenue from subscription contracts entered into
during previous quarters. Consequently, a decline in new or
renewed subscription contracts in any one quarter will not be
fully reflected in revenue in that quarter, but will negatively
affect our revenue in future quarters. Accordingly, the effect
of significant downturns in new or renewed sales of our
subscriptions is not reflected in full in our results of
operations until future periods. Our subscription revenue also
makes it difficult for us to rapidly increase our revenue
through additional subscription sales in any period, as revenue
from new and renewal subscription contracts must be recognized
over the applicable subscription period. Furthermore, increases
in the average term of subscription contracts would result in
revenue for subscription contracts being recognized over longer
periods of time.
The
average sales prices of our products may decrease, which may
reduce our gross profits and adversely impact our financial
results.
While we expect that our average sales prices will decline as we
continue to execute on our strategy to target the small- and
medium-sized business, or SMB, market, the average
sales prices for our products may also decline for a variety of
other reasons, including competitive pricing pressures,
discounts we offer, a change in our mix of products,
anticipation of the introduction of new products or promotional
programs. Competition continues to increase in the market
segments in which we participate and we expect competition to
further increase in the future, thereby leading to increased
pricing pressures. Larger competitors with more diverse product
offerings may reduce the price of products that compete with
ours in order to promote the sale of other products or may
bundle them with other products. Additionally, although we
typically price our products and services worldwide in
U.S. dollars, currency fluctuations in certain countries
and regions may negatively impact actual prices that partners
and subscribers are willing to pay in those countries and
regions. Furthermore, we anticipate that the average sales
prices and gross profits for our products will decrease over
product life cycles. We cannot assure you that we will be
successful in developing and introducing new offerings with
enhanced functionality on a timely basis, or that our product
offerings, if introduced, will enable us to maintain our prices
and gross profits at levels that will allow us to maintain
profitability.
We
cannot accurately predict subscription renewal rates or the rate
at which subscribers will purchase additional or enhanced
products or services from us, or the impact these rates may have
on our future revenue and operating results.
Our subscribers have no obligation to renew their subscriptions
for our products and services after the expiration of their
initial subscription period, which is typically one year but has
been as long as five years, or to purchase additional products
or services from us. In addition, our subscribers may renew for
fewer subscriptions, renew for shorter contract lengths, or
renew for lower cost editions of our products. We cannot
accurately predict renewal rates and our renewal rates may
decline or fluctuate as a result of a number of factors,
including subscriber dissatisfaction with our products,
subscribers ability to continue their operations and
spending levels and
24
deteriorating general economic conditions. If our subscribers do
not renew their subscriptions for our products, our revenue may
decline and our business may suffer.
Our future success also depends in part on our ability to sell
additional features, products and services or enhanced versions
of our products and services to our current subscribers. This
may also require increasingly sophisticated and costly sales
efforts. Similarly, the rate at which our subscribers purchase
new or enhanced products depends on a number of factors,
including general economic conditions. If our efforts to sell
new or enhanced products and services to our subscribers are not
successful, our business may suffer.
A
portion of our revenue is generated by sales to government
entities, which are subject to a number of challenges and
risks.
Sales to U.S. and foreign federal, state and local
governmental agency customers have accounted for a portion of
our revenue in past periods, and we may in the future increase
sales to government entities. Sales to government entities are
subject to a number of risks. Selling to government entities can
be highly competitive, expensive and time consuming, often
requiring significant upfront time and expense without any
assurance that we will win a sale. Government demand and payment
for our products and services may be impacted by public sector
budgetary cycles and funding authorizations, with funding
reductions or delays adversely affecting public sector demand
for our products. Governments routinely investigate and audit
government contractors administrative processes, and any
unfavorable audit could result in the government refusing to
continue buying our products and services, a reduction of
revenue or fines or civil or criminal liability if the audit
uncovers improper or illegal activities. Any such penalties
could materially adversely impact our results of operations.
Finally, for purchases by the U.S. government, the
government may require certain products to be manufactured in
the United States and other high cost manufacturing locations,
and we may not manufacture all products in locations that meet
the requirements of the U.S. government.
Failure
to comply with laws or regulations applicable to our business
could cause us to lose U.S. government customers or our ability
to contract with the U.S. government.
We must comply with laws and regulations relating to the
formation, administration and performance of
U.S. government contracts, which affect how we do business
with U.S. government agencies. These laws and regulations
may impose added costs on our business, and failure to comply
with these or other applicable regulations and requirements,
including non-compliance in the past, could lead to penalties,
termination of contracts and suspension or debarment from
government contracting for a period of time with
U.S. government agencies. Any such damages, penalties,
disruption or limitation in our ability to do business with the
U.S. government could have a material adverse effect on our
business, operating results and financial condition.
We
have grown, and may continue to grow, through acquisitions that
give rise to risks and challenges that could adversely affect
our future financial results.
We have grown, and may continue to grow, through acquisitions of
other businesses, business units and technologies. Most
recently, we acquired BitArmor Systems, Inc., Intellitactics and
Breach Security in 2010. Any future acquisitions will depend on
our ability to identify suitable acquisition candidates, to
negotiate acceptable terms for their acquisition and to finance
those acquisitions. There are no assurances that we will be
successful in finding suitable acquisition candidates. When and
if we are able to identify candidates, we will likely face
competition from other potential acquirers that may increase our
costs. Acquisitions can involve a number of special risks and
challenges, including:
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complexity, time, and costs associated with these acquisitions,
including the integration of acquired business operations,
workforce, products and technologies into our existing business,
sales force, employee base, product lines and technology;
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diversion of management time and attention from our existing
business and other business opportunities;
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difficulties in retaining key personnel of the acquired business
and additional costs that may be incurred as a result;
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loss or termination of employees, including costs associated
with the termination or replacement of those employees;
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inability to maintain key pre-acquisition customer, supplier and
employee relationships;
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assumption of debt or other liabilities of the acquired
business, including litigation related to the acquired business
or intellectual property assets acquired in connection with such
acquisitions;
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increased expenses and working capital requirements;
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the addition of acquisition-related debt; and
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dilution of stock ownership of existing stockholders.
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Integrating acquired businesses has been and will continue to be
a complex, time consuming, and expensive process, and can also
impact the effectiveness of our internal control over financial
reporting. To integrate acquired businesses, we must implement
our technology systems in the acquired operations and integrate
and manage the personnel of the acquired operations. We also
must effectively integrate the different cultures of acquired
business organizations into our own in a way that aligns various
interests, and may need to enter new markets in which we have no
or limited experience and where competitors in such markets have
stronger market positions.
Any of the foregoing, and other factors, could harm our ability
to achieve anticipated levels of profitability from acquired
businesses or to realize other anticipated benefits of such
acquisitions. In addition, because acquisitions of technology
companies are inherently risky, no assurance can be given that
our previous or future acquisitions will be successful and will
not adversely affect our business, operating results or
financial condition.
We may also seek to restructure our business in the future by
disposing of certain of our assets. There can be no assurance
that any restructuring of our business will not adversely affect
our business, operating results or financial condition. In
addition, any significant restructuring of our business will
require significant managerial attention which may be diverted
from our operations and may require us to accept non-cash
consideration for any sales of our assets, the market value of
which may fluctuate.
Adverse
conditions in the national and global economies and financial
markets may adversely affect our business and financial
results.
National and global economies and financial markets have
experienced a downturn stemming from a multitude of factors,
including adverse credit conditions impacted by the
sub-prime
mortgage crisis, slower or receding economic activity, concerns
about inflation and deflation, fluctuating energy costs, high
unemployment, decreased consumer confidence, reduced corporate
profits and capital spending, adverse business conditions and
liquidity concerns and other factors. The severity or length of
time these economic and financial market conditions may persist
is unknown. During challenging economic times, periods of high
unemployment and in tight credit markets, many customers may
delay or reduce technology purchases. This could result in
reductions in sales of our products, longer sales cycles,
difficulties in collection of accounts receivable, slower
adoption of new technologies and increased price competition.
These results may persist even if a number of economic
conditions improve. Specific economic trends, such as declines
or softness in government or corporate IT spending, would have a
more direct impact on our business. Any of these events would
likely harm our business, operating results, cash flows and
financial condition.
We may
need additional capital in the future if our business plans,
growth strategies or other factors change, and our failure to
obtain capital could interfere with our business.
We believe that our cash and cash equivalents following the
completion of this offering together with cash flow from
operations will be sufficient to fund our operations and meet
our near-term expected capital expenditure needs. However, we
may need additional capital in the future if our business plans,
growth strategies or other factors change. Our ability to obtain
financing will depend on a number of factors, some of which are
outside our control, including market conditions, our operating
performance and investor interest. These factors may make the
timing, amount, terms and conditions of any financing
unattractive. They may also result in our incurring additional
indebtedness or accepting stockholder dilution. As of
March 31, 2011, we had no outstanding borrowings and
26
$2.0 million of outstanding letters of credit under our
$20.0 million loan agreement. If adequate funds are not
available when needed or are not available on acceptable terms,
we may have to forego strategic acquisitions or investments,
defer our product development activities, or delay the
introduction of new or enhanced products.
Our
estimates or judgments relating to our critical accounting
policies are based on assumptions that may change or prove to be
incorrect, and this may have an adverse effect on our results of
operations or financial condition.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes.
We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Our operating
results may be adversely affected if our assumptions change or
if actual circumstances differ from those in our assumptions,
which could cause our operating results to fall below the
expectations of securities analysts and investors.
We may
not be able to utilize a significant portion of our net
operating loss carry-forwards, which could adversely affect our
results of operations.
Due to losses recognized for federal and state income tax
purposes in prior periods, we have generated significant federal
and state net operating loss carry-forwards that may expire
before we are able to utilize them. In addition, under
U.S. federal and state income tax laws, if over a rolling
three-year period, the cumulative change in our ownership
exceeds 50%, our ability to utilize our net operating loss
carry-forwards to offset future taxable income may be limited.
Changes in ownership can occur due to transactions in our stock
or the issuance of additional shares of our common stock or, in
certain circumstances, securities convertible into our common
stock. We have exceeded this 50% cumulative change threshold in
prior periods, which has limited our ability to use a portion of
our net operating loss carry-forwards. The effect of these
transactions or future transactions on our cumulative change in
ownership may further limit our ability to utilize our net
operating loss carry-forwards to offset future taxable income.
Furthermore, it is possible that transactions in our stock that
may not be within our control may cause us to exceed the 50%
cumulative change threshold and may impose a limitation on the
utilization of our net operating loss carry-forwards in the
future. Also, the existing net operating loss carry-forwards of
corporations we have acquired may be subject to substantial
limitations arising from ownership changes prior to or in
connection with their acquisition by us or may expire prior to
our ability to utilize them. In the event the usage of our net
operating loss carry-forwards is subject to limitation and we
are profitable, our results of operations could be materially
adversely affected.
Risks
Relating to this Offering and Ownership of Our Common
Stock
An
active, liquid trading market for our common stock may not
develop following this offering, which could limit your ability
to sell your shares of our common stock at an attractive price,
or at all.
Prior to this offering, there has been no public market for our
common stock. We cannot predict the extent to which investor
interest in our company will lead to the development of an
active trading market in our common stock or how liquid that
market might become. An active public market for our common
stock may not develop or be sustained after the offering. If an
active public market does not develop or is not sustained, it
may be difficult for you to sell your shares of common stock at
a price that is attractive to you, or at all. The market price
for shares of our common stock may decline below the initial
public offering price, and you may not be able to resell your
shares of common stock at or above the initial public offering
price.
27
Market
volatility may affect our stock price and the value of your
investment.
Following the completion of this offering, the market price for
our common stock is likely to be volatile, in part because our
shares have not been previously traded publicly. In addition,
the market price of our common stock may fluctuate significantly
in response to a number of factors, most of which we cannot
predict or control, including:
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announcements of new product launches, commercial relationships,
acquisitions or other events by us or our competitors;
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failure of any of our products to achieve commercial success;
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fluctuations in stock market prices and trading volumes of
securities of similar companies;
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general market conditions and overall fluctuations in
U.S. equity markets;
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variations in our operating results, or the operating results of
our competitors;
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changes in our financial guidance to investors and analysts or
our failure to achieve such expectations;
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delays in or our failure to provide financial guidance;
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changes in securities analysts estimates of our financial
performance or our failure to achieve such estimates;
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sales of large blocks of our common stock, including sales by
our executive officers, directors and significant stockholders;
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additions or departures of any of our key personnel;
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announcements related to litigation;
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changes in accounting principles or methodologies;
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changing legal or regulatory developments in the U.S. and
other countries; and
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discussion of us or our stock price by the financial press and
in online investor communities.
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In addition, the stock market in general has experienced
substantial price and volume volatility that is often seemingly
unrelated to the operating performance of particular companies.
These broad market fluctuations may cause the trading price of
our common stock to decline. In the past, securities class
action litigation has often been brought against a company after
a period of volatility in the market price of its common stock.
We may become involved in this type of litigation in the future.
Any securities litigation claims brought against us could result
in substantial expenses and the diversion of our
managements attention from our business.
If you
purchase shares of common stock sold in this offering, you will
incur immediate and substantial dilution.
If you purchase shares of common stock in this offering, you
will incur immediate and substantial dilution in the amount of
$ per share, because the initial
public offering price of $ per
share is substantially higher than the pro forma net tangible
book value per share of our outstanding common stock. In
addition, you may also experience additional dilution upon
future equity issuances or the exercise of stock options to
purchase common stock granted to our employees, executive
officers, consultants and directors under our stock option and
equity incentive plans. For additional information, see
Dilution.
We do
not expect to pay any cash dividends for the foreseeable
future.
We do not anticipate that we will pay any cash dividends on
shares of our common stock for the foreseeable future. Any
determination to pay dividends in the future will be at the
discretion of our board of directors and will depend upon
results of operations, financial condition, contractual
restrictions, restrictions imposed by applicable law and other
factors our board of directors deems relevant. Additionally, we
are currently prohibited from paying cash dividends by the loan
agreement governing our $20.0 million revolving credit
facility, and we expect these restrictions to continue in the
future. Accordingly, if you purchase shares in this offering,
realization of a gain on
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your investment will depend on the appreciation of the price of
our common stock, which may never occur. Investors seeking cash
dividends in the foreseeable future should not purchase our
common stock.
Following
this offering, investment funds managed by affiliates of FTV
Capital, MBK Ventures, LLC and Richard Kiphart will own a
substantial percentage of our common stock, which may prevent
new investors from influencing significant corporate
decisions.
Upon completion of this offering, (i) investment funds
managed by Financial Technology Management II, L.L.C. and
FTVentures Management III, L.L.C., or collectively FTV
Capital, will beneficially own
approximately shares,
or %, of our outstanding common
stock, (ii) MBK Ventures, LLC, or MBK Ventures,
which is beneficially owned by Robert McCullen and Andrew Bokor,
each of whom is an executive officer and director, will
beneficially own
approximately shares,
or %, of our outstanding common
stock, and (iii) Richard Kiphart, one of our directors,
will beneficially own
approximately shares,
or %, of our outstanding common
stock. In the event that the underwriters exercise their
over-allotment option in full, FTV Capital, MBK Ventures and
Mr. Kiphart will own
approximately %, %
and % of our outstanding common
stock, respectively. As a result, FTV Capital, MBK Ventures and
Mr. Kiphart will, for the foreseeable future, have
significant influence over all matters requiring stockholder
approval, including the election of directors, adoption of or
amendments to equity-based incentive plans, amendments to our
amended and restated certificate of incorporation and certain
mergers, acquisitions and other
change-of-control
transactions. The ownership of a large amount of our voting
power by FTV Capital, MBK Ventures and Mr. Kiphart may have
an adverse effect on the price of our common stock. FTV Capital,
MBK Ventures and Mr. Kiphart may have divergent interests
among themselves, and their interests may not be consistent with
your interests as a stockholder.
Future
sales of our common stock, or the perception in the public
markets that these sales may occur, may depress our stock
price.
Upon completion of this offering, there will
be shares
of our common stock outstanding. Of these, shares being sold in
this offering
(or shares
if the underwriters exercise their over-allotment option in
full) will be freely tradable immediately after this offering
(except for any shares purchased by affiliates, if any)
and shares
may be sold upon expiration of
lock-up
agreements 180 days after the date of this prospectus
(subject in some cases to volume limitations). In addition, as
of March 31, 2011, we had outstanding options to
purchase shares
of common stock that, if exercised, will result in these
additional shares becoming available for sale upon expiration of
the lock-up
agreements. A large portion of these shares and options are held
by a small number of persons and investment funds. Sales by
these stockholders or option holders of a substantial number of
shares after this offering could significantly reduce the market
price of our common stock. Moreover, certain holders of shares
of common stock have rights, subject to some conditions, to
require us to file registration statements covering the shares
they currently hold, or to include these shares in registration
statements that we may file for ourselves or other stockholders.
We also intend to register all common stock that we may issue
under our 2001 Stock Incentive Plan and the 2011 Incentive Plan.
Effective upon the completion of this offering, an aggregate
of shares
of our common stock will be reserved for future issuance under
the 2011 Incentive Plan,
plus shares
reserved but unissued under our 2001 Stock Incentive Plan. Once
we register these shares, which we plan to do shortly after the
completion of this offering, they can be freely sold in the
public market upon issuance, subject to the
lock-up
agreements referred to above. If a large number of these shares
are sold in the public market, the sales could reduce the
trading price of our common stock.
Our
future operating results may fluctuate significantly and our
current operating results may not be a good indication of our
future performance. Fluctuations in our quarterly financial
results could affect our stock price in the
future.
Our revenues and operating results have historically varied from
period-to-period,
and we expect that they will continue to do so as a result of a
number of factors, many of which are outside of our control. If
our quarterly financial results or our predictions of future
financial results fail to meet the expectations of securities
analysts and investors, our stock price could be negatively
affected. Any volatility in our quarterly financial results may
make it
29
more difficult for us to raise capital in the future or pursue
acquisitions that involve issuances of our stock. Our operating
results for prior periods may not be effective predictors of our
future performance.
Factors associated with our industry, the operation of our
business and the markets for our products may cause our
quarterly financial results to fluctuate, including:
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slower than expected conversion of enrollees to subscribers;
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failure to expand our partner network;
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loss of a significant member or group of members from our
partner network;
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entry of new competition into our markets;
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the level of demand for our products and services;
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competitive pricing pressure for one or more of our products,
services or solutions;
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our ability to timely complete the release of new or enhanced
versions of our products;
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failure to successfully execute our cross-sell strategy;
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changes in laws or industry standards relating to privacy or
data security compliance, or enforcement thereof;
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fluctuations in foreign currency exchange rates;
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the number, severity and timing of threat outbreaks, which may
fluctuate from
period-to-period;
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changes in interest rates;
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changes in the competitive landscape of our industry, including
consolidation among our competitors and customers;
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our ability to control costs, including operating expenses;
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our ability to hire, train and retain key personnel;
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political and military instability, which could slow spending
within our target markets, delay sales cycles, and otherwise
adversely affect our ability to generate revenues and operate
effectively;
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deferral of orders from customers in anticipation of new
products or product enhancements announced by us or our
competitors;
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budgetary cycles and constraints of customers, which are
influenced by corporate earnings and government budget cycles
and spending objectives;
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insolvency or credit difficulties confronting our customers,
affecting their ability to purchase or pay for our products and
services;
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seasonal buying patterns;
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changes in subscriber renewal rates for our services;
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acts of war or terrorism; and
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intentional disruptions by third parties.
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Any one of the factors above or the cumulative effect of some of
the factors referred to above may result in significant
fluctuations in our quarterly financial and other operating
results, including fluctuations in our key metrics. This
variability and unpredictability could result in our failing to
meet our internal operating plan or the expectations of
securities analysts or investors for any period. If we fail to
meet or exceed such expectations for these or any other reasons,
the market price of our shares could fall substantially and we
could face costly lawsuits, including securities class action
suits. In addition, a significant percentage of our operating
expenses are fixed in
30
nature and based on forecasted revenue trends. Accordingly, in
the event of revenue shortfalls, we are generally unable to
mitigate the negative impact on margins in the short term.
Anti-takeover
provisions in our charter documents and Delaware law might
discourage or delay acquisition attempts for us that you might
consider favorable.
Our amended and restated certificate of incorporation and
amended and restated bylaws will contain provisions that may
make the acquisition of our company more difficult without the
approval of our board of directors. These provisions include:
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a classified board of directors so that not all members of our
board of directors are elected at one time;
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authorization of the issuance of undesignated preferred stock,
the terms of which may be established and the shares of which
may be issued without stockholder approval, and which may
include super voting, special approval, dividend, or other
rights or preferences superior to the rights of the holders of
common stock;
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prohibition on stockholder action by written consent unless such
action is recommended by all directors then in office, which
requires that all stockholder actions not so approved be taken
at a meeting of our stockholders;
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requirement that two-thirds of our stockholders approve certain
amendments to our amended and restated certificate of
incorporation or amended and restated bylaws;
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special meetings of our stockholders may only be called by a
resolution adopted by a majority of our directors then in office;
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express authorization for our board of directors to make, alter,
or repeal our amended and restated bylaws; and
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advance notice requirements for nominations for elections to our
board of directors or for proposing matters that can be acted
upon by stockholders at stockholder meetings.
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In addition, we will be governed by the provisions of
Section 203 of the Delaware General Corporation Law, or the
DGCL, which limits the ability of stockholders
owning in excess of 15% of our outstanding voting stock to merge
or combine with us. Although we believe these provisions
collectively provide for an opportunity to obtain greater value
for stockholders by requiring potential acquirers to negotiate
with our board of directors, they would apply even if an offer
rejected by our board were considered beneficial by some
stockholders. In addition, these provisions may frustrate or
prevent any attempts by our stockholders to replace or remove
our current management by making it more difficult for
stockholders to replace members of our board of directors, which
is responsible for appointing the members of our management.
These anti-takeover provisions and other provisions under
Delaware law could discourage, delay or prevent a transaction
involving a change in control of our company, even if doing so
would benefit our stockholders. These provisions could also
discourage proxy contests and make it more difficult for you and
other stockholders to elect directors of your choosing and to
cause us to take other corporate actions you desire.
If we
fail to maintain an effective system of internal controls, we
may not be able to report our financial results on time, and
current and potential investors could lose confidence in our
financial reporting.
Effective internal controls are necessary for us to provide
reliable financial reports. If we cannot provide reliable
financial reports, our business and operating results could be
negatively impacted. The need for improvements in our system of
internal controls has been identified in the past and may be
identified in the future. During our 2010 audit, a material
weakness in our system of internal controls over financial
reporting was identified which may impact our ability to produce
financial statements consistent with the requirements of a
public company. This weakness related to the sufficiency of
technical accounting expertise as well as sufficiency of our
processes and procedures in place to ensure an accurate and
timely financial reporting close process, primarily processes
and procedures related to timely and accurate reporting from
some of our smaller foreign subsidiaries. In addition, we have
identified a significant deficiency regarding the need to
improve interim period reporting procedures and
31
controls. A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of our financial statements will not be prevented,
or detected and corrected on a timely basis. A significant
deficiency is a deficiency, or combination of deficiencies, in
internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit
attention by those charged with governance.
Any failure to implement and maintain the improvements in our
system of internal controls over financial reporting, or
difficulties encountered in the implementation of these
improvements in our system of internal controls, could cause us
to fail to meet our reporting obligations. Any failure to
improve our system of internal controls to address the
identified material weaknesses could also cause investors to
lose confidence in our reported financial information, which
could have a negative impact on our company.
We have begun implementing measures and plan to take additional
steps to remediate the underlying causes of the material
weakness. In particular, we intend to improve our internal
control over financial reporting and have hired personnel with
technical accounting and internal control experience. In
addition, implementing controls over the monitoring and
reporting of our foreign subsidiaries and implementing controls
commensurate with our quarterly reporting requirements. However,
there can be no assurance that we will be able to effectively
remediate the identified material weakness or that additional
material weaknesses will not be identified in the future
relative to our system of internal controls over financial
reporting.
We are not currently required to comply with the rules of the
Securities and Exchange Commission, or the SEC,
implementing Section 404 of the Sarbanes-Oxley Act of 2002,
or the SO Act, and are therefore not required to
make a formal assessment of the effectiveness of our internal
control over financial reporting for that purpose. Upon becoming
a public company, we will be required to comply with the
SECs rules implementing Section 302 and 404 of the SO
Act, which will require management to certify financial and
other information in our quarterly and annual reports and
provide an annual management report on the effectiveness of
controls over financial reporting. Though we will be required to
disclose changes made in our internal controls and procedures on
a quarterly basis, we will not be required to make our first
annual assessment of our internal control over financial
reporting pursuant to Section 404 until the year following
our first annual report required to be filed with the SEC. To
comply with the requirements of being a public company, we may
need to undertake various actions, such as implementing new
internal controls and procedures and hiring accounting or
internal audit staff.
Our independent registered public accounting firm is not
required to formally attest to the effectiveness of our internal
controls over financial reporting until the year following our
first annual report required to be filed with the SEC. At such
time, our independent registered public accounting firm may
issue a report that is adverse, in the event it is not satisfied
with the level at which our controls are documented, designed or
operating. Our remediation efforts may not enable us to avoid a
material weakness in the future.
We
will incur significant increased costs as a result of operating
as a public company, and our management will be required to
divert attention from operational and other business matters to
devote substantial time to public company
requirements.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
For example, we will be required to comply with the requirements
of the SO Act, as well as rules and regulations subsequently
implemented by the SEC and our stock exchange, including the
establishment and maintenance of effective disclosure and
financial controls and changes in corporate governance
practices. We expect that compliance with these requirements
will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly. In
addition, we expect that our management and other personnel will
need to divert attention from operational and other business
matters to devote substantial time to these public company
requirements. In particular, we expect to incur significant
expenses and devote substantial management effort toward
ensuring compliance with the requirements of Section 404 of
the SO Act. In that regard, we currently do not have an internal
audit function, and we will need to hire additional accounting
and financial staff with appropriate public company experience
and technical accounting knowledge. We also expect that
operating as a public company will make it more difficult and
more expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced policy
limits and coverage or incur substantially higher costs
32
to obtain the same or similar coverage. As a result, it may be
more difficult for us to attract and retain qualified people to
serve on our board of directors, our board committees or as
executive officers.
We
will have broad discretion in how we use the proceeds of this
offering and we may not use these proceeds effectively. This
could affect our profitability and cause our share price to
decline.
Our management and board of directors will have considerable
discretion in the application of the net proceeds of this
offering, and you will not have the opportunity, as part of your
investment decision, to assess whether we are using the proceeds
appropriately. We currently intend to use the net proceeds for
general corporate purposes, which could include a variety of
uses such as funding working capital, operating expenses, the
continued development of our new or enhanced versions of our
products and technology and the selective pursuit of business
development opportunities. From time to time, for example, we
will consider acquisitions or investments if a suitable
opportunity arises, in which case a portion of the proceeds may
be used to fund such an acquisition or investment. We have no
commitments or understandings to make any such acquisition or
investment. We may use the net proceeds for corporate purposes
that do not improve our profitability or increase our market
value, which could cause our share price to decline. See
Use of Proceeds.
Our
business and stock price may suffer as a result of our lack of
public company operating experience. In addition, if securities
or industry analysts do not publish research or publish
inaccurate or unfavorable research about our business, our stock
price and trading volume could decline.
We have never operated as a public company. Our lack of public
company operating experience may make it difficult to forecast
and evaluate our future prospects. If we are unable to execute
our business strategy and grow our business, either as a result
of our inability to manage our current size, effectively manage
the business in a public company environment or manage our
future growth or for any other reason, our business, prospects,
financial condition and results of operations may be harmed.
In addition, as a new public company we do not currently have
and may never obtain research coverage by securities and
industry analysts. If no securities or industry analysts
commence coverage of our company, the trading price for our
stock would be negatively impacted. If we obtain securities or
industry analyst coverage and if one or more of the analysts who
covers us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts ceases coverage
of us or fails to publish reports on us regularly, demand for
our stock could decrease, which could cause our stock price and
trading volume to decline.
33
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements that are
subject to risks and uncertainties. All statements other than
statements of historical fact included in this prospectus are
forward-looking statements. Forward-looking statements give our
current expectations and projections relating to our financial
condition, results of operations, plans, objectives, future
performance and business. You can identify forward-looking
statements by the fact that they do not relate strictly to
historical or current facts. These statements may include words
such as anticipate, estimate,
expect, project, forecast,
continue, plan, intend,
believe, may, will,
should, can have, likely and
other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or
financial performance or other events. For example, all
statements we make relating to our estimated and projected
costs, expenditures, cash flows, growth rates and financial
results, our plans and objectives for future operations, growth
or initiatives, strategies or the expected outcome or impact of
pending or threatened litigation are forward-looking statements.
All forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially
from those that we expected, including:
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PCI may be changed, cancelled, replaced or not enforced, new or
different technologies that minimize the need for PCI may be
widely adopted, or we may lose certain of our PCI certifications;
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we may lose a significant member or group of members of our
partner network, fail to engage new partners or one of our
partners may decide to use our products less or compete against
us;
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we may be unable to develop and maintain relationships with
businesses, government entities and other organizations within
our existing partner network that have not enrolled their
customers into TrustKeeper, or whose customers have enrolled but
have not become subscribers;
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we may lack sufficient financial or other resources to maintain
or improve our competitive position;
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we may not be able to compete effectively with companies that
integrate or bundle products similar to ours with their other
product offerings;
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we may not be successful in executing our strategy to increase
our sales to larger enterprises;
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our efforts to expand our product and service offerings beyond
the PCI market may not succeed;
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defects or vulnerabilities in our products or services or the
failure of our products to adequately prevent a security breach
or protect data assets;
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we may fail to timely update our products in response to new
security threats or to detect security attacks;
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our internal network system could be compromised by computer
hackers, which would harm public perception of our security
products and services;
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damage or disruptions to our facilities, including our corporate
headquarters and third-party data center hosting facility, which
could impair the delivery of our products and services;
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delays or cost overruns related to our development activities;
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we may fail to accurately predict, prepare for and respond
promptly to technological and market developments and changing
customer needs and develop corresponding products;
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our new products and product enhancements may not achieve
sufficient market acceptance;
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we may fail to effectively manage our growth; and
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the other risks set forth in the section entitled Risk
Factors in this prospectus.
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We derive many of our forward-looking statements from our
operating budgets and forecasts, which are based upon many
detailed assumptions. While we believe that our assumptions are
reasonable, we caution that it is very difficult to predict the
impact of known factors, and it is impossible for us to
anticipate all factors that could affect our actual results.
Important factors that could cause actual results to differ
materially from our expectations, or cautionary statements, are
disclosed under the sections entitled Risk Factors
and Managements Discussion and Analysis of Financial
Condition and Results of Operations in this prospectus.
All written and oral forward-looking
34
statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the cautionary
statements as well as other cautionary statements that are made
from time to time in our other SEC filings and public
communications. You should evaluate all forward-looking
statements made in this prospectus in the context of these risks
and uncertainties.
We caution you that the important factors described in the
sections in this prospectus entitled Risk Factors
and Managements Discussion and Analysis of Financial
Condition and Results of Operations may not be all of the
factors that are important to you. In addition, we cannot assure
you that we will realize the results or developments we expect
or anticipate or, even if substantially realized, that they will
result in the consequences or affect us or our operations in the
way we expect. The forward-looking statements included in this
prospectus are made only as of the date hereof. We undertake no
obligation to publicly update or revise any forward-looking
statement as a result of new information, future events or
otherwise, except as otherwise required by law.
35
MARKET
AND INDUSTRY DATA AND FORECASTS
Market data and certain industry data and forecasts that we have
included in this prospectus were obtained from internal company
surveys, market research, consultant surveys, publicly available
information, reports of governmental agencies and industry
publications and surveys. We have relied upon publications of
IDC as our primary source for third-party industry data and
forecasts. Industry surveys, publications, consultant surveys
and forecasts generally state that the information contained
therein has been obtained from sources believed to be reliable.
While we believe that each of these surveys, forecasts and
publications is reliable based upon our managements
knowledge of the industry, we have not independently verified
any of the data from third-party sources. Statements as to our
market position are based on recently available data. In a
number of places in this prospectus, we have included
MasterCards estimate of the number of locations at which
its payment cards are accepted in order to convey the size of
the PCI market. We obtained this information from
MasterCards annual report filed with the SEC. We believe
that MasterCards estimate of the number of locations at
which its payment cards are accepted is reliable and
representative of the total number of payment card acceptance
locations because MasterCard is one of the largest and most
pervasive payment card brands in the world. While we are not
aware of any misstatements regarding our industry data presented
herein, our estimates involve risks and uncertainties and are
subject to change based on various factors, including those
discussed under the heading Risk Factors appearing
elsewhere in this prospectus. While we believe our internal
business research is reliable and market definitions are
appropriate, neither such research nor definitions have been
verified by any independent source.
36
USE OF
PROCEEDS
We estimate that the net proceeds from our issuance and sale
of shares
of common stock in this offering will be approximately
$ million, assuming an
initial public offering price of $
per share, which is the midpoint of the price range listed on
the cover page of this prospectus, and after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) our net proceeds from this offering by
approximately $ million,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same and after
deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
If the underwriters exercise their over-allotment option in
full, we estimate that the net proceeds from this offering will
be approximately $ million,
assuming an initial public offering price of
$ per share, which is the midpoint
of the price range listed on the cover page of this prospectus,
and after deducting underwriting discounts and commissions and
estimated offering expenses payable by us.
The principal purposes of this offering are to increase our
capitalization and financial flexibility to pursue internal and
external opportunities, to increase our visibility in the market
place, to create a public market for our common stock and to
facilitate our future access to the public equity markets. We
expect to use substantially all of the net proceeds for general
corporate purposes, which we expect to include funding working
capital, operating expenses, the continued development of our
products and services, the strengthening of our existing
commercial organization and the selective pursuit of business
development opportunities, which could include acquisitions of
other companies. At this time, we have not specifically
identified a large single use for which we intend to use the net
proceeds, and, accordingly, we are not able to allocate the net
proceeds among any of these potential uses in light of the
variety of factors that will impact how such net proceeds are
ultimately utilized by us. Such factors include how quickly we
are able to begin to generate operating profits, whether our
revenues continue to increase and, if so, the rate of any such
increase, and business development opportunities that may arise
in the future. As a result, our management will retain broad
discretion over the allocation of the net proceeds from this
offering.
Pending use of the proceeds from this offering, we intend to
invest the proceeds in short-term, investment-grade and
interest-bearing instruments or money market funds.
37
DIVIDEND
POLICY
We have never paid any dividends on our Class A common
stock, Class B common stock or preferred stock. We
currently intend to retain all available funds and any future
earnings to fund the development and growth of our business and
therefore we do not anticipate paying any cash dividends in the
foreseeable future. We are currently prohibited from paying cash
dividends on or making any distributions with respect to our
capital stock under the terms of our loan agreement, and we
expect these restrictions to continue in the foreseeable future.
For additional information, see Description of Certain
Indebtedness. Any future determination to pay dividends
will be at the discretion of our board of directors, subject to
compliance with covenants in current and future agreements
governing our indebtedness, and will depend upon our results of
operations, financial condition, capital requirements and other
factors that our board of directors deems relevant.
38
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our consolidated capitalization as of March 31, 2011 on:
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an actual basis;
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a pro forma basis to give effect to the Recapitalization,
including the conversion of all of the outstanding shares of our
Class A common stock, Class B common stock and
preferred stock
into shares
of common stock, and the
one-for- reverse
stock split; and
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a pro forma as adjusted basis also gives effect to our issuance
and sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share,
which is the midpoint of the price range listed on the cover
page of this prospectus, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
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You should read the following table in conjunction with the
sections entitled Use of Proceeds, Unaudited
Pro Forma Consolidated Financial Data, Selected
Historical Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
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As of March 31, 2011
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Pro Forma as
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Actual
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Pro Forma
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Adjusted
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(unaudited)
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(unaudited)
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(in thousands, except share data)
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Cash and cash equivalents
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$
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18,492
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$
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$
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Revolving credit
facility(1)
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$
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$
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$
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Convertible redeemable preferred
stock(2)(3):
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Series A-1,
$0.0001 par value, 10,952,633 shares authorized;
10,952,633 shares issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma and pro forma as
adjusted
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13,666
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Series A-2,
$0.0001 par value, 11,505,258 shares authorized;
11,505,258 issued and outstanding, actual; no shares authorized,
issued or outstanding, pro forma and pro forma as adjusted
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8,018
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Stockholders
equity(3):
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Series B preferred stock, $0.0001 par value,
5,882,353 shares authorized; 5,882,351 issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted
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10,000
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Class B convertible common stock, $0.0001 par value,
5,625,990 shares authorized; 4,945,371 shares issued
and outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted
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Class A common stock, $0.0001 par value,
150,223,874 shares authorized; 93,509,597 issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted
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9
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Preferred stock, $0.01 par value per share; no shares
authorized, no shares issued and outstanding, actual;
5,000,000 shares authorized, no shares issued and
outstanding, pro forma and pro forma as adjusted
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Common stock, $0.01 par value per share; no share
authorized, no shares issued and outstanding,
actual; shares
authorized, pro forma and pro forma as
adjusted; shares
issued and outstanding, pro forma;
and shares
issued and outstanding pro forma as adjusted
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Additional paid-in capital
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51,115
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Accumulated deficit
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(23,488
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)
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Accumulated other comprehensive income
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343
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Total stockholders equity
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37,979
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Total capitalization
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$
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120,175
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$
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$
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39
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(1)
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The revolving credit facility under
our loan agreement provides for aggregate borrowings of up to
$20.0 million. See Description of Certain
Indebtedness-Amended
and Restated Loan and Security Agreement.
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(2)
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Our
Series A-1
preferred stock and
Series A-2
preferred stock can be redeemed upon the written request of
holders of two-thirds of the
Series A-1
preferred stock or
Series A-2
preferred stock, respectively, at an amount equal to their
respective liquidation preference. Since this redemption feature
is not in our control, we have classified our
Series A-1
preferred stock and
Series A-2
preferred stock as temporary equity on our consolidated balance
sheets. For additional information regarding the terms of our
preferred stock, see note 14 to the notes to our
consolidated financial statements included elsewhere in this
prospectus.
|
|
|
|
(3)
|
|
The number of our authorized and
outstanding preferred stock, Class A common stock and Class
B common stock as of March 31, 2011 on an actual basis have
not been adjusted to give effect to the Recapitalization.
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share, the
midpoint of the price range set forth on the cover page of this
prospectus, would increase (decrease) the pro forma as adjusted
amount for each of cash and cash equivalents, additional paid-in
capital, total stockholders equity and total
capitalization by approximately
$ million, assuming that the
number of shares offered by us, as set forth on the cover of
this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The number of shares of common stock to be outstanding after
this offering is based on shares outstanding as of
March 31, 2011. This number excludes:
|
|
|
|
|
shares of our common stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price
of $ per share as of
March 31, 2011;
|
|
|
|
|
|
shares of our common stock issuable upon the exercise of
outstanding warrants at a weighted average exercise price of
$ per share as of March 31,
2011; and
|
|
|
|
|
|
an aggregate
of shares
of our common stock reserved for future issuance under our 2001
Stock Incentive Plan and under the 2011 Incentive Plan that we
intend to adopt in connection with this offering.
|
40
DILUTION
After giving effect to the Recapitalization, our pro forma net
tangible book value as of March 31, 2011 was approximately
$ million, or approximately
$ per share. Pro forma net
tangible book value per share represents the amount of our total
tangible assets less the amount of our total liabilities,
divided by the number of shares of common stock outstanding at
March 31, 2011, prior to the sale
of shares
of common stock offered in this offering, but assuming the
completion of our Recapitalization. Dilution in pro forma net
tangible book value per share represents the difference between
the amount per share paid by investors in this offering and the
net tangible book value per share of our common stock
outstanding immediately after this offering.
After giving effect to the completion of the Recapitalization
and the sale
of shares
of common stock in this offering, based upon an assumed initial
public offering price of $ per
share, the midpoint of the range set forth on the cover of this
prospectus, after deducting underwriting discounts and
commissions and estimated expenses payable by us in connection
with this offering, our pro forma as adjusted net tangible book
value as of March 31, 2011 would have been approximately
$ million, or
$ per share of common stock. This
represents an immediate decrease in pro forma net tangible book
value of $ per share to existing
stockholders and immediate dilution of
$ per share to new investors
purchasing shares of common stock in this offering at the
initial public offering price.
The following table illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value (deficit) per share as of
March 31, 2011 (which gives effect to the Recapitalization)
|
|
$
|
|
|
|
|
|
|
Increase in net tangible book value per share attributable to
new investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value (deficit) per
share as of March 31, 2011 (which gives effect to the
Recapitalization and this offering)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes, as of March 31, 2011, on a
pro forma as adjusted basis giving effect to the
Recapitalization and the sale
of shares
of common stock in this offering, the number of shares of our
common stock purchased from us, the aggregate cash consideration
paid to us and the average price per share paid to us by
existing stockholders and to be paid by new investors purchasing
shares of our common stock from us in this offering. The table
assumes an initial public offering price of
$ per share, the midpoint of the
range set forth on the cover of this prospectus, after deducting
estimated underwriting discounts and commissions and estimated
offering expenses payable by us in connection with this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Per
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Share
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
$
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share, the
midpoint of the price range set forth on the cover of this
prospectus, would increase (decrease) the total consideration
paid by investors participating in this offering by
$ million, or increase
(decrease) the percent of total consideration paid by investors
participating in this offering
by %, assuming that the number of
shares offered by us, as set forth on the cover of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
Except as otherwise indicated, the discussion and tables above
assume no exercise of the underwriters option to purchase
additional shares and no exercise of any outstanding options. If
the underwriters option to purchase
41
additional shares is exercised in full, our existing
stockholders would own
approximately % and our new
investors would own approximately %
of the total number of shares of our common stock outstanding
after this offering.
The tables and calculations above are based on shares of common
stock outstanding as of March 31, 2011 (after giving effect
to the Recapitalization) and exclude:
|
|
|
|
|
shares of our common stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price
of $ per share as of
March 31, 2011;
|
|
|
|
|
|
shares of our common stock issuable upon the exercise of
outstanding warrants at a weighted average exercise price of
$ per share as of March 31,
2011; and
|
|
|
|
|
|
an aggregate
of shares
of common stock reserved for issuance under our 2001 Stock
Incentive Plan and under the 2011 Incentive Plan that we intend
to adopt in connection with this offering.
|
To the extent that any outstanding options are exercised or if
new options or other equity incentive grants are issued in the
future with an exercise price or purchase price below the
initial public offering price, new investors will experience
further dilution.
42
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables set forth our unaudited consolidated
statement of operations for the year ended December 31,
2010 on a pro forma basis to give effect to (i) the
acquisition of Breach Security, which was completed on
June 18, 2010, and Intellitactics, which was completed on
March 1, 2010, as if each of these acquisitions had
occurred on January 1, 2010 and (ii) the
Recapitalization, including the conversion of all of the
outstanding shares of our Class A common stock,
Class B common stock and preferred stock into a single
class of common stock and the
one-for- reverse stock split, and
on a pro forma as adjusted basis to also give effect to our
issuance and sale
of shares
of common stock in this offering at an assumed public offering
price of $ per share, which is the
midpoint of the price range listed on the cover page of this
prospectus, after deducting underwriting discounts and
commissions and estimated offering expense payable by us, as if
all such transactions had occurred on January 1, 2010. In
connection with the acquisitions, all of our assets and
liabilities were revised to reflect the fair values on the date
of acquisition, based upon our allocation of the overall
purchase price to the underlying net assets acquired. The
following tables also set forth our unaudited consolidated
statement of operations for the three months ended
March 31, 2011 on a pro forma basis to give effect to the
Recapitalization, including the conversion of all of the
outstanding shares of our Class A common stock,
Class B common stock and preferred stock into a single
class of common stock and the
one-for-
reverse stock split, and on a pro forma as adjusted basis to
also give effect to our issuance and sale
of shares
of common stock in this offering at an assumed public offering
price of $ per share, which is the
midpoint of the price range listed on the cover page of this
prospectus, after deducting underwriting discounts and
commissions and estimated offering expense payable by us, as if
all such transactions had occurred on January 1, 2011.
The unaudited pro forma financial information is based on our
historical financial statements and the historical financial
statements of Breach Security and Intellitactics, and certain
adjustments which we believe to be reasonable, to give effect to
these transactions, which are described in the notes to our
consolidated financial statements referenced below.
The unaudited pro forma consolidated statement of operations for
the year ended December 31, 2010 does not give effect to
the acquisition of BitArmor, which was completed on
January 6, 2010, as its pre-acquisition results are not
significant. The unaudited pro forma consolidated statement of
operations is presented for informational purposes only and does
not purport to represent the financial position and results of
operations that would have been achieved had the acquisitions
been completed as of the date indicated or our future financial
position or results of operations.
The following unaudited pro forma consolidated statements of
operations should be read in conjunction with:
|
|
|
|
|
the accompanying notes to the unaudited pro forma consolidated
statements of operations;
|
|
|
|
|
|
our unaudited consolidated financial statements for the three
months ended March 31, 2011, and the notes relating
thereto, included elsewhere in this prospectus;
|
|
|
|
|
|
our audited consolidated financial statements for the year ended
December 31, 2010, and the notes relating thereto, included
elsewhere in this prospectus;
|
|
|
|
|
|
the consolidated financial statements of Breach Security for the
period from January 1, 2010 through March 31, 2010,
and the notes relating thereto, included elsewhere in this
prospectus;
|
|
|
|
the consolidated financial statements of Intellitactics for the
period January 1, 2010 through February 28, 2010, and
the notes relating thereto, included elsewhere in this
prospectus; and
|
|
|
|
the sections entitled Selected Historical Consolidated
Financial Data and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
included elsewhere in this prospectus.
|
The impacts of the acquisitions of Breach Security and
Intellitactics are already reflected in our consolidated balance
sheet as of March 31, 2011. See Capitalization
for additional information regarding the effects of the
Recapitalization and the issuance and sale
of shares
of common stock in this offering on our cash and cash
equivalents, convertible redeemable preferred stock and
stockholders equity.
43
TRUSTWAVE
HOLDINGS, INC.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breach
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustwave
|
|
|
Intellitactics
|
|
|
Recapitalization
|
|
|
|
|
|
Offering
|
|
|
Pro Forma As
|
|
|
|
Historical
|
|
|
Adjustments(A)
|
|
|
Adjustments(B)
|
|
|
Pro Forma
|
|
|
Adjustments(C)
|
|
|
Adjusted
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
81,677
|
|
|
$
|
3,169
|
|
|
$
|
|
|
|
$
|
84,846
|
|
|
$
|
|
|
|
$
|
|
|
Professional services
|
|
|
19,639
|
|
|
|
473
|
|
|
|
|
|
|
|
20,112
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
10,187
|
|
|
|
870
|
|
|
|
|
|
|
|
11.057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
111,503
|
|
|
|
4,512
|
|
|
|
|
|
|
|
116,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
|
33,415
|
|
|
|
1,069
|
|
|
|
|
|
|
|
34,484
|
|
|
|
|
|
|
|
|
|
Product sales, excluding depreciation and amortization
|
|
|
1,715
|
|
|
|
79
|
|
|
|
|
|
|
|
1,794
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization(1)
|
|
|
1,403
|
|
|
|
65
|
|
|
|
|
|
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
36,533
|
|
|
|
1,213
|
|
|
|
|
|
|
|
37,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
74,970
|
|
|
|
3,299
|
|
|
|
|
|
|
|
78,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
20,112
|
|
|
|
1,931
|
|
|
|
|
|
|
|
22,043
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
29,264
|
|
|
|
2,853
|
|
|
|
|
|
|
|
32,117
|
|
|
|
|
|
|
|
|
|
General and
administrative(1)(2)
|
|
|
29,602
|
|
|
|
3,920
|
|
|
|
|
|
|
|
33,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
78,978
|
|
|
|
8,704
|
|
|
|
|
|
|
|
87,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,008
|
)
|
|
|
(5,405
|
)
|
|
|
|
|
|
|
(9,413
|
)
|
|
|
|
|
|
|
|
|
Interest income (expense),
net(3)
|
|
|
(87
|
)
|
|
|
3
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
Other income (loss), net
|
|
|
(155
|
)
|
|
|
235
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(4,250
|
)
|
|
|
(5,167
|
)
|
|
|
|
|
|
|
(9,417
|
)
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(372
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
(395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,622
|
)
|
|
$
|
(5,190
|
)
|
|
|
|
|
|
$
|
(9,812
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative annual preferred dividends
|
|
|
(1,800
|
)
|
|
|
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(6,422
|
)
|
|
$
|
(5,190
|
)
|
|
$
|
1,800
|
|
|
$
|
(9,812
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share (basic and diluted)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Weighted-average number of shares used to compute net loss per
common share (basic and diluted)
|
|
|
86,721,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma consolidated
statement of operations.
44
TRUSTWAVE
HOLDINGS, INC.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the
Three Months Ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustwave
|
|
|
Recapitalization
|
|
|
|
|
|
Offering
|
|
|
Pro Forma As
|
|
|
|
Historical
|
|
|
Adjustments(B)
|
|
|
Pro Forma
|
|
|
Adjustments(C)
|
|
|
Adjusted
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
23,448
|
|
|
$
|
|
|
|
$
|
23,448
|
|
|
$
|
|
|
|
$
|
|
|
Professional services
|
|
|
5,721
|
|
|
|
|
|
|
|
5,721
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
2,229
|
|
|
|
|
|
|
|
2,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
31,398
|
|
|
|
|
|
|
|
31,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
|
9,363
|
|
|
|
|
|
|
|
9,363
|
|
|
|
|
|
|
|
|
|
Product sales, excluding depreciation and amortization
|
|
|
508
|
|
|
|
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
450
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
10,321
|
|
|
|
|
|
|
|
10,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21,077
|
|
|
|
|
|
|
|
21,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
6,194
|
|
|
|
|
|
|
|
6,194
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
7,122
|
|
|
|
|
|
|
|
7,122
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
7,002
|
|
|
|
|
|
|
|
7,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,318
|
|
|
|
|
|
|
|
20,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
759
|
|
|
|
|
|
|
|
759
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
Other income (loss), net
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
769
|
|
|
|
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(110
|
)
|
|
|
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
659
|
|
|
|
|
|
|
$
|
659
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative annual preferred dividends
|
|
|
(450
|
)
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
209
|
|
|
$
|
450
|
|
|
$
|
659
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Diluted
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Weighted-average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
91,783,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
98,215,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma consolidated
statement of operations.
45
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS
|
|
(A) |
The table set forth below includes the historical operating
results of Breach Security from January 1, 2010 to
June 17, 2010 and Intellitactics from January 1, 2010
to February 28, 2010. The results of Breach Security and
Intellitactics operations subsequent to the acquisition dates of
June 18, 2010 and March 1, 2010, respectively, have
been included in our audited consolidated historical financial
statements included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breach
|
|
|
Breach
|
|
|
Breach
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Security
|
|
|
Security
|
|
|
Security
|
|
|
|
|
|
Intellitactics
|
|
|
Intellitactics
|
|
|
|
|
|
Breach
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Purchase
|
|
|
Total
|
|
|
Historical
|
|
|
Purchase
|
|
|
|
|
|
Security
|
|
|
|
January 1, 2010
|
|
|
April 1, 2010
|
|
|
Accounting and
|
|
|
Breach
|
|
|
January 1, 2010
|
|
|
Accounting and
|
|
|
Total
|
|
|
and
|
|
|
|
to
|
|
|
to
|
|
|
Other
|
|
|
Security
|
|
|
to
|
|
|
Other
|
|
|
Intellitactics
|
|
|
Intellitactics
|
|
|
|
March 31, 2010
|
|
|
June 17, 2010
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
February 28, 2010
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
|
(in thousands)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
1,264
|
|
|
$
|
864
|
|
|
$
|
|
|
|
$
|
2,128
|
|
|
$
|
1,041
|
|
|
$
|
|
|
|
$
|
1,041
|
|
|
$
|
3,169
|
|
Professional services
|
|
|
34
|
|
|
|
84
|
|
|
|
|
|
|
|
118
|
|
|
|
355
|
|
|
|
|
|
|
|
355
|
|
|
|
473
|
|
Product sales
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
6
|
|
|
|
864
|
|
|
|
|
|
|
|
864
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,302
|
|
|
|
950
|
|
|
|
|
|
|
|
2,252
|
|
|
|
2,260
|
|
|
|
|
|
|
|
2,260
|
|
|
|
4,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
|
421
|
|
|
|
328
|
|
|
|
|
|
|
|
749
|
|
|
|
320
|
|
|
|
|
|
|
|
320
|
|
|
|
1,069
|
|
Product sales, excluding depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
79
|
|
|
|
79
|
|
Depreciation and
amortization(1)
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
78
|
|
|
|
78
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
421
|
|
|
|
328
|
|
|
|
(13
|
)
|
|
|
736
|
|
|
|
399
|
|
|
|
78
|
|
|
|
477
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
881
|
|
|
|
622
|
|
|
|
13
|
|
|
|
1,516
|
|
|
|
1,861
|
|
|
|
(78
|
)
|
|
|
1,783
|
|
|
|
3,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
735
|
|
|
|
698
|
|
|
|
|
|
|
|
1,433
|
|
|
|
498
|
|
|
|
|
|
|
|
498
|
|
|
|
1,931
|
|
Sales and marketing
|
|
|
1,182
|
|
|
|
1,042
|
|
|
|
|
|
|
|
2,224
|
|
|
|
629
|
|
|
|
|
|
|
|
629
|
|
|
|
2,853
|
|
General and
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
administrative(1)(2)
|
|
|
620
|
|
|
|
1,634
|
|
|
|
(118
|
)
|
|
|
2,193
|
|
|
|
1,759
|
|
|
|
(129
|
)
|
|
|
1,727
|
|
|
|
3,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,537
|
|
|
|
3,374
|
|
|
|
(61
|
)
|
|
|
5,850
|
|
|
|
2,886
|
|
|
|
(32
|
)
|
|
|
2,854
|
|
|
|
8,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,656
|
)
|
|
|
(2,752
|
)
|
|
|
74
|
|
|
|
(4,334
|
)
|
|
|
(1,025
|
)
|
|
|
(46
|
)
|
|
|
(1,071
|
)
|
|
|
(5,405
|
)
|
Interest income (expense),
net(3)
|
|
|
(222
|
)
|
|
|
(235
|
)
|
|
|
460
|
|
|
|
3
|
|
|
|
(123
|
)
|
|
|
123
|
|
|
|
|
|
|
|
3
|
|
Other income (loss), net
|
|
|
(3
|
)
|
|
|
46
|
|
|
|
|
|
|
|
43
|
|
|
|
192
|
|
|
|
|
|
|
|
192
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,881
|
)
|
|
|
(2,941
|
)
|
|
|
534
|
|
|
|
(4,288
|
)
|
|
|
(956
|
)
|
|
|
77
|
|
|
|
(879
|
)
|
|
|
(5,167
|
)
|
Income tax expense
|
|
|
(8
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,889
|
)
|
|
$
|
(2,956
|
)
|
|
$
|
534
|
|
|
$
|
(4,311
|
)
|
|
$
|
(956
|
)
|
|
$
|
77
|
|
|
$
|
(879
|
)
|
|
$
|
(5,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Reflects the pro forma impact of
the recognized intangible assets of the Breach Security and
Intellitactics acquisitions. Amortization expense is related to
capitalized customer relationships amortized over five to ten
years, capitalized trade names amortized over one to nine years
and capitalized acquired proprietary technology amortized over
four to eight years. The incremental amortization expense from
the pro forma presentation results in an additional $219 in
amortization expense for the year ended December 31, 2010.
This increase in amortization was attributable to $142 for
customer relationships, $65 for proprietary technology and $12
for trademarks.
|
|
(2)
|
|
We incurred transaction-related
costs of $118 and $129 for the Breach Security and
Intellitactics acquisitions, respectively. A pro forma
adjustment has been made to eliminate these costs.
|
46
|
|
|
(3)
|
|
The Breach Security and
Intellitactics acquisitions included the settlement of acquiree
debt. A pro forma adjustment has been made to eliminate the
historical interest expense of $460 and $123 for Breach Security
and Intellitactics, respectively.
|
|
|
(B)
|
Gives effect to the Recapitalization, including the conversion
of all of the outstanding shares of our Class A common
stock, Class B common stock and preferred stock into a
single class of common stock and the one-for- reverse stock
split. Our outstanding preferred stock accrues cumulative annual
dividends, which are payable only upon liquidation, dissolution
or winding up of the Company or when and if declared by our
board of directors. Our board of directors has not declared any
dividends on our preferred stock and all accumulated dividends
on such preferred stock will be extinguished in connection with
the Recapitalization. In addition, the reverse stock split that
will be implemented as part of the Recapitalization will
decrease the weighted-average number of shares used to compute
net loss per common share.
|
|
(C)
|
Gives further effect to our issuance and sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share,
which is the midpoint of the price range listed on the cover
page of this prospectus, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us,
in each case as if such transactions had occurred on such date
and the application of the net proceeds therefrom as set forth
under Use of Proceeds. The offering will increase
the weighted-average number of shares used to compute net loss
per common share.
|
47
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical
consolidated financial data as of and for the periods indicated.
We have derived the selected historical consolidated financial
data as of and for the years ended December 31, 2006, 2007,
2008, 2009 and 2010 from our audited consolidated financial
statements for such period or years, as applicable. For
comparison purposes, certain balances with respect to the
financial data for the years ended December 31, 2006 and
2007 have been reclassified in order to conform with the
presentation for the years ended December 31, 2008, 2009
and 2010. We have derived the selected historical consolidated
financial data as of March 31, 2011 and for the three
months ended March 31, 2010 and 2011 from our unaudited
consolidated financial statements for such periods. Our audited
consolidated financial statements as of December 31, 2009
and 2010 and for each of the three years in the period ended
December 31, 2010 and our unaudited consolidated financial
statements as of March 31, 2011 and for the three months
ended March 31, 2010 and 2011 have been included in this
prospectus. Our historical results are not necessarily
indicative of the operating results that may be expected in the
future.
The selected historical consolidated data presented below should
be read in conjunction with the sections entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
For the Year Ended December 31,
|
|
|
Ended March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
18,220
|
|
|
$
|
33,996
|
|
|
$
|
44,356
|
|
|
$
|
56,708
|
|
|
$
|
81,677
|
|
|
$
|
16,829
|
|
|
$
|
23,448
|
|
Professional services
|
|
|
4,603
|
|
|
|
9,096
|
|
|
|
13,219
|
|
|
|
15,056
|
|
|
|
19,639
|
|
|
|
3,342
|
|
|
|
5,721
|
|
Product sales
|
|
|
4,103
|
|
|
|
2,423
|
|
|
|
753
|
|
|
|
1,343
|
|
|
|
10,187
|
|
|
|
1,518
|
|
|
|
2,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
26,926
|
|
|
|
45,515
|
|
|
|
58,328
|
|
|
|
73,107
|
|
|
|
111,503
|
|
|
|
21,689
|
|
|
|
31,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
|
8,578
|
|
|
|
16,443
|
|
|
|
22,525
|
|
|
|
26,431
|
|
|
|
33,415
|
|
|
|
7,406
|
|
|
|
9,363
|
|
Product sales, excluding depreciation and amortization
|
|
|
3,206
|
|
|
|
1,615
|
|
|
|
440
|
|
|
|
481
|
|
|
|
1,715
|
|
|
|
273
|
|
|
|
508
|
|
Depreciation and amortization
|
|
|
120
|
|
|
|
396
|
|
|
|
591
|
|
|
|
718
|
|
|
|
1,403
|
|
|
|
266
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
11,904
|
|
|
|
18,454
|
|
|
|
23,556
|
|
|
|
27,630
|
|
|
|
36,533
|
|
|
|
7,945
|
|
|
|
10,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
15,022
|
|
|
|
27,061
|
|
|
|
34,772
|
|
|
|
45,477
|
|
|
|
74,970
|
|
|
|
13,744
|
|
|
|
21,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
1,517
|
|
|
|
4,184
|
|
|
|
6,749
|
|
|
|
9,146
|
|
|
|
20,112
|
|
|
|
3,744
|
|
|
|
6,194
|
|
Sales and marketing
|
|
|
7,079
|
|
|
|
11,689
|
|
|
|
14,059
|
|
|
|
17,388
|
|
|
|
29,264
|
|
|
|
5,753
|
|
|
|
7,122
|
|
General and administrative
|
|
|
9,527
|
|
|
|
12,989
|
|
|
|
16,030
|
|
|
|
20,511
|
|
|
|
29,602
|
|
|
|
6,491
|
|
|
|
7,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
18,123
|
|
|
|
28,862
|
|
|
|
36,838
|
|
|
|
47,045
|
|
|
|
78,978
|
|
|
|
15,988
|
|
|
|
20,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(3,101
|
)
|
|
|
(1,801
|
)
|
|
|
(2,066
|
)
|
|
|
(1,568
|
)
|
|
|
(4,008
|
)
|
|
|
(2,244
|
)
|
|
|
759
|
|
Interest expense, net
|
|
|
51
|
|
|
|
(84
|
)
|
|
|
(151
|
)
|
|
|
(112
|
)
|
|
|
(87
|
)
|
|
|
(36
|
)
|
|
|
(8
|
)
|
Other income (loss), net
|
|
|
(269
|
)
|
|
|
(23
|
)
|
|
|
193
|
|
|
|
(304
|
)
|
|
|
(155
|
)
|
|
|
(106
|
)
|
|
|
18
|
|
Gain on acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,319
|
)
|
|
|
(1,908
|
)
|
|
|
(2,024
|
)
|
|
|
(1,432
|
)
|
|
|
(4,250
|
)
|
|
|
(2,386
|
)
|
|
|
769
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
(114
|
)
|
|
|
(372
|
)
|
|
|
(78
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,319
|
)
|
|
$
|
(1,908
|
)
|
|
$
|
(2,046
|
)
|
|
$
|
(1,546
|
)
|
|
$
|
(4,622
|
)
|
|
$
|
(2,464
|
)
|
|
$
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative annual preferred dividends
|
|
$
|
(1,000
|
)
|
|
$
|
(1,000
|
)
|
|
$
|
(1,441
|
)
|
|
$
|
(1,800
|
)
|
|
$
|
(1,800
|
)
|
|
|
(450
|
)
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders
|
|
$
|
(4,319
|
)
|
|
$
|
(2,908
|
)
|
|
$
|
(3,487
|
)
|
|
$
|
(3,346
|
)
|
|
$
|
(6,422
|
)
|
|
$
|
(2,914
|
)
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
|
(0.10
|
)
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
(0.07
|
)
|
|
|
(0.04
|
)
|
|
|
0.00
|
|
Diluted(2)
|
|
|
(0.10
|
)
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
(0.07
|
)
|
|
|
(0.04
|
)
|
|
|
0.00
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
For the Year Ended December 31,
|
|
|
Ended March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
|
41,218,831
|
|
|
|
67,095,828
|
|
|
|
69,100,346
|
|
|
|
71,339,985
|
|
|
|
86,721,283
|
|
|
|
79,317,662
|
|
|
|
91,783,570
|
|
Diluted(2)
|
|
|
41,218,831
|
|
|
|
67,095,828
|
|
|
|
69,100,346
|
|
|
|
71,339,985
|
|
|
|
86,721,283
|
|
|
|
79,317,662
|
|
|
|
98,215,085
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,243
|
|
|
$
|
(462
|
)
|
|
$
|
671
|
|
|
$
|
20,943
|
|
|
$
|
(10,212
|
)
|
|
$
|
(5,495
|
)
|
|
$
|
4,646
|
|
Investing activities
|
|
|
159
|
|
|
|
(4,796
|
)
|
|
|
(2,226
|
)
|
|
|
(2,292
|
)
|
|
|
8,581
|
|
|
|
2,410
|
|
|
|
(882
|
)
|
Financing activities
|
|
|
(652
|
)
|
|
|
1,483
|
|
|
|
6,668
|
|
|
|
(1,165
|
)
|
|
|
(7,495
|
)
|
|
|
(6,375
|
)
|
|
|
190
|
|
Depreciation and amortization
|
|
|
1,233
|
|
|
|
1,747
|
|
|
|
2,136
|
|
|
|
3,012
|
|
|
|
4,970
|
|
|
|
1,021
|
|
|
|
1,517
|
|
Capital expenditures
|
|
|
507
|
|
|
|
1,771
|
|
|
|
1,786
|
|
|
|
2,743
|
|
|
|
4,273
|
|
|
|
333
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,235
|
|
|
$
|
1,441
|
|
|
$
|
6,594
|
|
|
$
|
23,916
|
|
|
$
|
14,558
|
|
|
$
|
18,492
|
|
Working
capital(3)
|
|
|
2,948
|
|
|
|
(5,199
|
)
|
|
|
2,391
|
|
|
|
9,659
|
|
|
|
256
|
|
|
|
(676
|
)
|
Total assets
|
|
|
35,208
|
|
|
|
45,272
|
|
|
|
55,021
|
|
|
|
86,675
|
|
|
|
122,068
|
|
|
|
120,175
|
|
Total
debt(4)
|
|
|
1,283
|
|
|
|
5,533
|
|
|
|
2,083
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Total convertible redeemable preferred
stock(5)
|
|
|
17,434
|
|
|
|
18,434
|
|
|
|
19,434
|
|
|
|
20,434
|
|
|
|
21,434
|
|
|
|
21,684
|
|
Total stockholders equity
|
|
|
6,550
|
|
|
|
5,914
|
|
|
|
12,845
|
|
|
|
14,382
|
|
|
|
36,203
|
|
|
|
37,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the cumulative annual
dividends payable on our outstanding preferred stock. Such
dividends are payable only upon liquidation, dissolution or
winding up of the Company or when and if declared by our board
of directors. Our board of directors has not declared any
dividends on our preferred stock and all accumulated dividends
on such preferred stock will be extinguished in connection with
the Recapitalization. For additional information regarding the
terms of our existing preferred stock, see notes 13 and 14
to our audited consolidated financial statements for the years
ended December 31, 2008, 2009 and 2010 and notes 11
and 12 to our unaudited consolidated financial statements for
the three months ended March 31, 2010 and 2011 included
elsewhere in this prospectus.
|
|
|
|
(2)
|
|
Net (loss) income per common share
(basic and diluted) and the weighted average number of shares
used to compute net (loss) income per common share (basic and
diluted) for the years ended December 31, 2006, 2007, 2008,
2009 and 2010 and for the three months ended March 31, 2010
and 2011 on an actual basis have been calculated without giving
effect to the Recapitalization.
|
|
|
|
(3)
|
|
Working capital is the amount by
which current assets exceed current liabilities.
|
|
(4)
|
|
Total debt includes notes payable,
both current and non-current.
|
|
(5)
|
|
Our
Series A-1
preferred stock and
Series A-2
preferred stock can be redeemed upon the written request of the
holders of two-thirds of our
Series A-1
preferred stock or
Series A-2
preferred stock, respectively, at an amount equal to their
respective liquidation preferences. Since this redemption
feature is not in our control, and does not have a date certain
or event certain redemption requirement, we have classified our
Series A-1
preferred stock and Series
A-2
preferred stock as temporary equity on our consolidated balance
sheet. For additional information regarding the terms of our
preferred stock, see note 14 to the notes to our
consolidated financial statements included elsewhere in this
prospectus.
|
49
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Selected Historical Consolidated
Financial Data and our consolidated financial statements
and related notes appearing elsewhere in this prospectus. In
addition to historical information, this discussion and analysis
contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of certain factors. We discuss factors
that we believe could cause or contribute to these differences
below and elsewhere in this prospectus, including those set
forth under Risk Factors.
Overview
Trustwave is a leading provider of on-demand data security
compliance solutions that enable businesses and other
organizations of all sizes to efficiently achieve and maintain
compliance with regulatory requirements and industry standards.
Our compliance management solutions, including our easy-to-use
software-as-a-service TrustKeeper offering, have helped hundreds
of thousands of organizations simplify the complex process of
validating compliance. Additionally, our broad suite of
compliance enablement solutions remediates data security
deficiencies, allowing our customers to achieve and maintain
compliance in a cost effective manner. These solutions assist
our subscribers in comprehensively securing their network
infrastructure, data communications and sensitive information
assets, protecting them against the increasing threats of
unauthorized access, fraudulent activity and other intrusions or
breaches. We have been successful in rapidly expanding our
customer base across a broad range of industries as a result of
our differentiated partner network, which is comprised of many
of the worlds largest financial institutions and other
organizations influential to the compliance and data security
mandates of their customers.
Our solutions include our industry leading software-as-a-service
TrustKeeper compliance management offering along with a
comprehensive suite of proprietary compliance enablement
solutions. TrustKeeper and the TrustKeeper Agent assist
organizations in validating compliance by analyzing, aggregating
and reporting on prohibited data storage, systems configurations
and security policy settings on subscribers systems or in
centralized or distributed IT environments. In addition, our
compliance enablement offerings provide a comprehensive,
integrated turnkey suite of data security solutions, including
encryption, extensible threat management, security information
and event management, network access control, web application
firewalls and data loss prevention. These solutions help address
vulnerabilities detected by TrustKeeper, allowing our customers
to achieve and maintain compliance.
We have reached many of our customers through our partner
network, which is comprised of approximately 75 organizations
influential to the compliance and data security mandates of
their customers. Our PCI partner network includes many of the
worlds leading financial institutions, major payment card
companies, and other members of the payment and IT ecosystem,
which we believe expands our global reach and reputation. In
addition to PCI, we plan to expand our partner network in health
care, government services and other sectors, facilitating the
distribution of our solutions that address relevant regulations
and standards, such as HIPAA and FISMA.
We conduct our operations through four geographic operating
segments, which are North America (U.S. and Canada), Europe
Middle East and Africa, or EMEA, Latin America and
the Caribbean, or LAC, and Asia Pacific, or
APAC. Each of our operating segments offers both
compliance management and compliance enablement solutions.
Important
Factors Affecting Our Operating Results and Financial
Condition
We believe our operating results and financial condition will
continue to be affected by the following factors:
Increasing Demand For Data Security Compliance
Solutions. We believe that the need for
on-demand, scalable, automated and cost-effective data security
compliance solutions will continue to increase as organizations
50
address a number of challenges of achieving and maintaining
compliance with regulatory requirements and industry standards,
including:
|
|
|
|
|
increasing data security threats, which have led to a heightened
regulatory and compliance environment;
|
|
|
|
regulatory and compliance requirements that are becoming
increasingly complex and difficult to achieve and
maintain; and
|
|
|
|
many existing compliance and data security solutions that are
highly complex and expensive.
|
In addition, we believe that the number of locations where data
is stored or transmitted, and consequently require protection,
will continue to increase for financial transactions, as well as
health care, government and other services. We believe we are
well-positioned to benefit from this increasing demand for data
security compliance solutions due to a number of key
differentiators of our solutions, including that they simplify
complex compliance processes, are cost-effective, scalable and
flexible, comprehensive and integrated, well-known and trusted
and utilize our proprietary knowledge and technology.
Continued Development of Our Partner
Network. We have developed a partner network
comprised of organizations influential to the compliance and
data security mandates of their customers. These organizations,
including many of the worlds leading financial
institutions and other payment service providers, serve as
differentiated and cost effective distribution partners for us,
and we typically co-brand and co-market with these organizations
to their customers. Many of our partners are in the midst of a
multi-year effort to monitor and enforce PCI compliance among
their payment card accepting customers. Historically, our
partners started this process with their enterprise customers
and in recent years they have expanded their focus to include
small- and medium-sized business payment card accepting
customers. As a result, we initially targeted the sale of our
compliance management solutions to enterprise customers.
Revenues from these enterprise customers accounted for a
majority of our growth in 2008. Since then, our partner network
has enabled us to expand into the SMB market, which contributed
to a substantial increase in our 2009 and 2010 revenue. During
2010, our five largest partner network members accounted for
15.7% of our revenue. We expect this concentration of revenue in
our five largest network partners to remain generally consistent
during the remainder of 2011. Going forward, we intend to focus
on increasing our subscriber base globally by converting more of
our PCI partner network payment card acceptance locations into
TrustKeeper subscriptions.
Sales to New Customers and Additional Sales to Our Existing
Customers. In addition to adding subscribers
through our partner network, we have been successful at
expanding our subscriber base through our direct sales efforts
that have been principally focused on adding enterprise
customers. We intend to continue to focus our direct sales
efforts on such enterprises and, in that regard, intend to add
new sales representatives, both domestically and
internationally, as well as to expand into new compliance
regimes and standards. Additionally, we believe that our
compliance management solutions will continue to generate
cross-selling opportunities to our installed base of our
comprehensive suite of compliance enablement solutions as
subscribers seek to remediate vulnerabilities identified by the
compliance management process.
Introduction of New Products and Further Expansion into
Specific Sectors. We believe it is important that
we continue to develop new and enhanced solutions to enable us
to capitalize on increasing demand for data security compliance
solutions. For example, we recently introduced our
end-to-end
encryption and tokenization solutions, which were specifically
designed to protect cardholder and other sensitive data.
Additionally, we intend to continue to expand our offerings
tailored to specific sectors, such as health care and
government, which we believe will allow us to better address
their specific compliance needs and further increase our
presence in these sectors.
Improvement in our Operating Performance. Our
recent operating results reflect our success in expanding our
subscriber base through our partner network and direct sales
efforts as well as increasing sales of our compliance enablement
solutions to existing subscribers through our added capabilities
from recent acquisitions. Our revenue increased from
$58.3 million in 2008 to $73.1 million in 2009 and
$111.5 million in 2010. During the same periods, our gross
margin has expanded from 60% in 2008 to 62% in 2009 and 67% in
2010. Our net loss was $2.0 million in 2008,
$1.5 million in 2009 and $4.6 million in 2010, while
our Adjusted EBITDA increased from $0.4 million in 2008 to
$3.1 million in 2009 and $4.9 million in 2010.
Although we believe our revenue will continue to increase in the
near term as we implement our growth strategy and benefit from
the increasing demand for data security compliance solutions and
the key differentiators of our solutions, we do not expect that
our revenue growth will
51
continue at these historical rates due, in part, to the
increasing size of our revenue base that will be used for
comparison purposes. To support our recent and expected revenue
growth and geographic expansion, we have recently hired a number
of employees in our finance, human resource and IT departments,
which has contributed to an increase in our general and
administrative expenses.
Selective Pursuit of Acquisitions. An
important part of our strategy to date has been the selective
acquisition of compliance enablement technologies to enhance our
ability to offer a cost-effective, comprehensive suite of data
security compliance solutions to our customers. In the last
three years, we acquired six companies with complementary
technologies and we are utilizing these acquired technologies to
enhance the capabilities of our overall product suite. For
example, we introduced our DataControl solution, which combines
our data loss prevention and persistent file encryption
technologies, we incorporated new value-added features into our
extensible threat management solution, and we developed our
360 Application Security Program, which combines our
SpiderLabs services with web application firewalls. For
additional information regarding these recent acquisitions, see
-Recent Acquisitions set forth below. Going forward,
we plan to continue to selectively pursue acquisitions of
technologies that bolster and complement our data security
solutions.
Revenue Composition. Our revenue composition
across subscription revenue, professional services, and product
sales has and will continue to vary from
period-to-period.
Our subscription revenue in any particular period is influenced
by a number of factors, including the number of new subscribers
added through our direct sales efforts, our network
partners rollout for our compliance management solutions
and subscriber turnover. Our professional services revenue in
any given period is typically impacted by the level of demand
for our security consulting services, as well as our ability to
hire, train and retain security professionals. Our product sales
are generally dependent on recent bookings trends, which can be
affected by a number of factors, such as customer budget cycles,
seasonality, buying preferences of customers and the
introduction of new solution offerings by us. Our revenue
composition has also been affected by our recent acquisitions
and may be impacted by any future acquisitions we may complete.
For example, our product sales in 2010 significantly increased
as compared to prior periods primarily as a result of our
acquisition of Intellitactics on March 1, 2010, which
accounted for $6.7 million of our product sales in 2010. As
a result of this significant increase, our subscription revenue
as a percentage of total revenue decreased by 4% during 2010 as
compared to 2009, despite a 44% increase in subscription revenue
during that period. During 2009, subscription revenue as a
percentage of total revenue increased by 2% as compared to 2008,
even as product sales experienced strong growth of 78% during
that period. The table below sets forth the amount of our
subscription revenue, professional services and product sales as
a percentage of revenue for each of our last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Three Months
|
|
|
|
For the Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
|
76.0
|
%
|
|
|
77.6
|
%
|
|
|
73.3
|
%
|
|
|
77.6
|
%
|
|
|
74.7
|
%
|
Professional services
|
|
|
22.7
|
|
|
|
20.6
|
|
|
|
17.6
|
|
|
|
15.4
|
|
|
|
18.2
|
|
Product sales
|
|
|
1.3
|
|
|
|
1.8
|
|
|
|
9.1
|
|
|
|
7.0
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As compared to 2010, we expect that our subscription revenue
will represent a greater percentage of our total revenue over
the longer term as a result of our focus in expanding our
subscriber base and cross-selling our subscription compliance
enablement solutions to our subscribers. We believe our
subscription revenue provides us with a significant level of
visibility with respect to our overall revenue for the next 12
months. The gross margins associated with these revenue
categories vary and, as a result, our gross margin will be
impacted by
period-to-period
changes in our revenue composition.
Foreign Currency Exchange Rates. As a result
of our international operations, we generate a portion of our
revenue and incur a portion of our expenses in currencies other
than the U.S. dollar, including the euro, the British
52
pound sterling, the Swedish krona, the Brazilian real, the South
African rand and the Australian dollar. Our results of
operations are impacted by currency exchange rate fluctuations
to the extent that we are unable to match net revenues received
in foreign currencies with expenses incurred in the same
currency. For example, where we have significantly more expenses
than net revenues generated in a foreign currency, our profit
from operations in that location would be adversely affected in
the event that the U.S. dollar depreciates against that
foreign currency. Although we are not currently engaged in any
financial hedging transactions, we may seek to mitigate the cash
effect of exchange rate fluctuations through the use of
derivative financial instruments. We record the effects from
changes in foreign currency exchange rates in our consolidated
statement of operations in other income (loss), net.
We present our consolidated financial statements in
U.S. dollars. As a result, we must translate the assets,
liabilities, net revenues and expenses of all of our operations
into U.S. dollars at applicable exchange rates.
Consequently, increases or decreases in the value of the
U.S. dollar may affect the value of these items with
respect to our
non-U.S. dollar
businesses in our consolidated financial statements, even if
their value has not changed in their local currency. For
example, a stronger U.S. dollar will reduce the relative
value of reported results of
non-U.S. dollar
operations and, conversely, a weaker U.S. dollar will
increase the relative value of the
non-U.S. dollar
operations. These translations could significantly affect the
comparability of our results between financial periods or result
in significant changes to the carrying value of our assets,
liabilities and stockholders equity.
Recent
Acquisitions
We believe that our ability to offer cost effective,
comprehensive compliance enablement solutions to help our
customers remediate vulnerabilities identified by our compliance
management solutions is a critical step toward achieving our
longer term growth strategy. In order to accelerate the time to
market of our compliance enablement offerings and take advantage
of the growth in our compliance management subscriber base, we
decided to acquire a number of the technologies required to
address certain data security requirements, specific customer
needs and evolving security threats. Our acquisitions have
enabled us to acquire a broad suite of core, enterprise-grade
security technologies and capabilities that we have been able to
successfully integrate into our overall solutions.
During the last three fiscal years, we have completed the
following acquisitions:
Breach Security, Inc. On June 18, 2010,
we acquired Breach Security, a provider of web application
firewall technology, or WAF, which provides
protection for web applications, such as
e-commerce
sites, against attacks. WAF helps organizations using active web
applications to safely maintain the flow of critical network
traffic into and out of their organizations and enables
compliance with multiple requirements of PCI as well as
requirements of other regulatory standards. We have utilized
this technology as part of our 360 Application Security Program.
Intellitactics, Inc. On March 1, 2010, we
acquired Intellitactics, a provider of security information and
event management, or SIEM, technology. This solution
provides comprehensive reporting of events logged in networks,
systems, applications and databases, and is a critical component
of robust security architectures, as well as a requirement of
many information security regulations and industry standards.
SIEM technology can be integrated with our other solutions at
customer sites to enable real-time analysis and reaction to
security threats through policy-based event monitoring. Also,
the SIEM solution is used internally by our secure operations
centers and plays a key role in the delivery of our managed
security services.
BitArmor Systems, Inc. On January 6,
2010, we acquired BitArmor Systems, Inc., or
BitArmor, a provider of data encryption solutions,
including full disk encryption and persistent file encryption.
Encrypting sensitive information is a key component to complying
with many data security standards, including PCI. The acquired
technology has also served as a foundation for both our
DataControl solution and our end-to-end encryption product.
Vericept Corporation. On August 26, 2009,
we acquired Vericept Corporation, or Vericept, to
provide our customers access to advanced data loss prevention
solutions. These solutions detect and analyze sensitive data
that may be traveling over corporate networks or that may be
stored on various enterprise devices. As part of a comprehensive
data protection technology suite, this acquired technology can
assist companies in meeting their security and compliance
objectives. This technology has also served as a foundation for
our DataControl solution.
53
Mirage Networks, Inc. On February 1,
2009, we acquired Mirage Networks, Inc., or Mirage
Networks, a provider of network access control solutions.
These solutions provide a means for customers to govern who
connects to their network, which devices they use and which IT
resources they are permitted to access. The acquired technology
meets one of the PCI requirements and can be used to aid
compliance with three other requirements by enforcing policies
with respect to server roles, host-based anti-virus and
operating system patch application. A lightweight network access
control solution, known as NAC Express, is integrated into our
extensible threat management solution.
ControlPath Inc. On August 18, 2008, we
acquired ControlPath Inc., a provider of solutions to manage and
automate enterprise governance, risk management and compliance
of multiple regulatory regimes. Since the data security
requirements across compliance initiatives are relatively
uniform, it is significantly more efficient to address them
through a single, unified compliance solution. We plan to
integrate components of this acquired technology to further
expand our offerings in other data security regimes such as
HIPAA and FISMA, among others.
Acquisition
Accounting and Related Matters
We accounted for each of the acquisitions described above using
the purchase method of accounting. As a result, the purchase
prices for each of these acquisitions were allocated to the
tangible and intangible assets acquired and liabilities assumed
based upon their respective fair values as of the date of each
acquisition. The excess of the purchase price over the fair
value of assets and liabilities was assigned to goodwill, which
is not amortized for accounting purposes, but is subject to
testing for impairment at least annually. At March 31,
2011, we had goodwill of $42.6 million and intangible
assets of $16.8 million. The application of purchase
accounting resulted in an increase in amortization and
depreciation expense in the periods subsequent to such
acquisitions relating to our acquired intangible assets. For
more information regarding our accounting for such acquisitions,
see note 2 to the notes to our consolidated financial
statements included elsewhere in this prospectus.
In connection with such acquisitions, we incurred acquisition,
transaction and integration expenses as well as severance and
transition costs. We have added these costs and expenses back to
our net loss in calculating Adjusted EBITDA. For more
information regarding our integration charges, see note 11
to the notes to our consolidated financial statements included
elsewhere in this prospectus. In certain instances, we have
experienced increases in our sales and marketing and product
development expenses in periods following certain acquisitions
as a result of adding additional sales and marketing and product
development personnel from those acquired businesses.
Important
Components of Our Statement of Operations
Revenues
Subscription Revenue. Subscription revenue
includes compliance management and compliance enablement
solutions sold under subscription arrangements. Our subscription
revenue is driven primarily by the number and type of services
to which our subscribers subscribe and is not concentrated
within one subscriber or group of subscribers. A majority of our
subscription revenue has been related to PCI compliance,
including through our TrustKeeper and Compliance Validation
solutions, which is expected to remain the main driver of
subscription revenue in the foreseeable future. We offer a
variety of billing options from monthly to annually depending on
the size of the contract and we initially record a subscription
fee as deferred revenue and then recognize it ratably over the
subscription period. The amount of deferred revenue recorded
depends on the invoicing terms as more frequent invoicing cycles
will not materially affect our deferred revenue balance while
less frequent invoicing cycles will affect such balance.
Professional Services. Services revenue
includes consulting, implementation, training and other
services. We recognize professional services revenue as the
services are performed. We offer a variety of billing options
including up front, milestone or percent completion. Depending
on the billing option, we may or may not record any deferred
revenue.
Product Sales. Product sales includes the sale
of perpetual software licenses and related hardware, such as our
security information and event management, web application
firewall and network access control solutions. We recognize
product revenue upon delivery or acceptance (deemed or explicit)
depending on the specific contract language.
54
Cost
of Sales
Service Delivery, Excluding Depreciation and
Amortization. Cost of service delivery includes
the cost of generating subscription revenue and professional
services revenue. Cost of service delivery, excluding
depreciation and amortization, primarily consists of expenses
related to delivery to and support of our compliance management
and compliance enablement customers. These expenses include
salaries, benefits, bonuses and stock-based compensation,
commissions, travel costs, outside service providers and data
center costs. In general, we do not allocate overhead such as
rent, IT costs and certain benefit program costs to cost of
services but instead we recognize these costs as general and
administrative expenses.
Product Sales, Excluding Depreciation and
Amortization. Cost of product sales consists
primarily of the expense associated with third party license
fees and related hardware.
Depreciation and Amortization. Depreciation
and amortization consists primarily of depreciation expense
related to customer premise equipment for our compliance
enablement offerings where any managed device resides at a
customer location and amortization expense for certain acquired
intangible assets.
We expect that these costs will continue to increase in absolute
dollars in the event our revenue continues to increase. As a
percentage of revenue, however, we expect these costs are likely
to continue to decrease as we improve our overall gross margin
through favorable changes in our revenue composition. Cost of
sales as a percentage of revenue could vary from
period-to-period
depending on a number of factors, including the timing and pace
of additional employee hiring and fluctuations in outside vendor
costs.
Operating
Expenses
Product Development. Our product development
expense consists primarily of personnel and related expense for
our product development and product management teams, including
salaries, benefits, bonuses and stock-based compensation,
commissions, travel costs, outside service providers and
recruiting costs. We have focused our development efforts
primarily to enhancing the functionality and expanding the
capabilities of our compliance management and compliance
enablement solutions. As a percentage of revenue, our product
development expense was 12%, 13% and 18% of revenue in 2008,
2009 and 2010, respectively, and 17% and 20% in the three months
ended March 31, 2010 and 2011, respectively. We expect to
continue to invest in product development to expand the
functionality and enhance the ease of use of our compliance
management and compliance enablement solutions. In the near
term, we expect that our product development expense is likely
to continue to increase in absolute dollars but that it will
remain relatively consistent with prior periods as a percentage
of revenue.
Sales and Marketing. Our sales and marketing
expense consists primarily of personnel and related expense for
our direct sales team, our sales engineers, our team that
recruits, enables and supports our partner network and our
marketing team. This expense includes salaries, benefits,
bonuses, stock-based compensation, commissions, travel costs,
outside service providers and recruiting costs. As a percentage
of revenue, our sales and marketing expenses were 24%, 24% and
26% in 2008, 2009 and 2010, respectively, and 27% and 23% in the
three months ended March 31, 2010 and 2011, respectively,
primarily due to our ongoing efforts to expand our subscriber
base. We intend to continue to invest in sales and marketing to
add new subscribers, increase penetration in our existing
subscriber base, build brand awareness and sponsor additional
marketing events and programs. In the near term, we expect that
our sales and marketing expenses will continue to increase in
absolute dollars but that it will remain relatively consistent
with prior periods as a percentage of revenue.
General and Administrative. Our general and
administrative expense consists primarily of personnel and
related expense for our executive, finance, legal, human
resources, IT and administrative personnel, including salaries,
benefits, bonuses and stock-based compensation, commissions,
travel costs, outside service providers and recruiting costs. We
also group support expense such as facilities, legal,
accounting, other professional service fees, corporate expense
and depreciation and amortization in general and administrative.
As a percentage of revenue, general and administrative expense
was 27%, 28% and 27% in 2008, 2009 and 2010, respectively, and
30% and 22% in the three months ended March 31, 2010 and
2011, respectively.
Going forward, we expect to continue to incur higher costs
associated with being a public company, including higher legal,
corporate insurance and accounting expenses and the additional
costs of achieving and maintaining
55
compliance with Section 404 of the Sarbanes-Oxley Act and
related regulations. We currently anticipate that we will be
required to begin to comply with Section 404 of the
Sarbanes-Oxley Act in 2012. We expect that general and
administrative expenses will increase in the near term in
absolute dollars because of these public company costs and our
efforts to expand our international operations. However, over
time we believe our general and administrative costs will
decline as a percentage of revenues as we expect to derive
greater efficiencies from our corporate infrastructure.
Gain
on Acquisition
Gain on acquisition was the result of our acquisition of Mirage
Networks on February 1, 2009. The total purchase price
consisted of the assumption of short-term liabilities and
resulted in a $0.6 million bargain purchase gain, which was
recorded as a gain on acquisition in our consolidated statement
of operations in 2009.
Income
Tax Expense
We estimate actual current tax expense together with assessing
temporary differences resulting from differing treatment of
items, such as accruals and allowances not currently deductible
for tax purposes. These differences result in deferred tax
assets and liabilities, which are included in our consolidated
balance sheets. In general, deferred tax assets represent future
tax benefits to be received when certain expenses previously
recognized in our consolidated statements of operations become
deductible expenses under applicable income tax laws or loss or
credit carry forwards are utilized. Accordingly, realization of
our deferred tax assets is dependent on future taxable income
against which these deductions, losses and credits can be
utilized. We must assess the likelihood that our deferred tax
assets will be recovered from future taxable income and to the
extent we believe that recovery is not more likely than not, we
must establish a valuation allowance.
Management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax
assets. For deferred tax assets generated in the U.S., the
United Kingdom, Brazil, Canada, Hong Kong, India and Singapore,
we recorded a full valuation allowance as of December 31,
2008, 2009 and 2010. Based on the available evidence, we
believed at that time it was more likely than not that we would
not be able to utilize all of our deferred tax assets in the
future. We intend to maintain the valuation allowance until
sufficient evidence exists to support the reversal of the
valuation allowance, either as a result of establishing a
pattern of profitability or the possible result of a to be
developed tax strategy assessing the need for the valuation
allowance. In that event, we would make an adjustment to the
allowance for the deferred tax asset, which would increase
income in the period that determination was made. At
December 31, 2010, we had federal net operating loss
carry-forwards of $45.3 million available to reduce future
taxable income in the United States.
We underwent a change in ownership for purposes of
Section 382 of the Internal Revenue Code of 1986, as
amended, or the Code, as a result of our merger with
Ambiron in 2005. As a result, the amount of our pre-change net
operating losses, or NOLs, and other tax attributes
that are available to offset future taxable income of
$5.8 million are subject to an annual limitation of
$0.7 million per year. Section 382 of the Code also
limited the annual deduction related to $10.5 million of
accumulated net operating losses acquired through the
acquisition of Secure Pipe, Inc in December, 2006 to
approximately $0.5 million per year. The annual limitation
is based on the value of the corporation as of the effective
date of the transaction. The ownership change and the resulting
annual limitation on use of NOLs are not expected to result in
the expiration of our NOL carry forwards if we are able to
generate sufficient future taxable income within the carry
forward periods. However, the limitation on the amount of NOLs
available to offset taxable income in a specific year may result
in the payment of income taxes before all NOLs have been
utilized. Additionally, a subsequent ownership change may result
in further limitation on the ability to utilize existing NOLs
and other tax attributes. Our NOLs are subject to expiration
from 2022 through 2029. For more information regarding income
taxes, see note 8 to the notes to our consolidated
financial statements included elsewhere in this prospectus.
Adjusted
EBITDA
We present Adjusted EBITDA, a non-GAAP financial measure, in
this prospectus to provide investors with a supplemental measure
of our operating performance. We believe that Adjusted EBITDA is
a useful performance measure and is used by us to facilitate a
comparison of our operating performance on a consistent basis
from
56
period-to-period
and to provide for a more complete understanding of factors and
trends affecting our business than GAAP measures can provide
alone. Our board of directors and management also use Adjusted
EBITDA as one of the primary methods for planning and
forecasting overall expectations and for evaluating on a
quarterly and annual basis actual results against such
expectations, and as a performance evaluation metric in
determining achievement of certain compensation programs and
plans for employees, including our senior executives.
We believe Adjusted EBITDA may be useful to investors in
comparing our operating performance consistently over time as it
removes from our operating results the impact of our capital
structure, asset base (primarily depreciation and amortization),
items outside the control of the management team (such as taxes
or changes in foreign currency exchange rates) and other
non-cash (such as purchase accounting adjustments) or
non-recurring items, including the impact of non-cash
stock-based compensation expense.
We define Adjusted EBITDA, a
non-GAAP
financial measure, as net income (loss) before income tax
expense (benefit), depreciation and amortization, net interest
expense, stock-based compensation, gain (loss) on foreign
currency exchange, severance and transition costs, and
acquisition, transaction and integration expenses.
The use of Adjusted EBITDA has limitations as an analytical tool
and you should not consider this performance measure in
isolation from, or as an alternative to, GAAP measures such as
net income/(loss) or loss from operations. Adjusted EBITDA is
not a measure of liquidity under GAAP or otherwise, and is not
an alternative to cash flow from continuing operating
activities. The limitations of Adjusted EBITDA include:
(i) it does not reflect our cash expenditures or future
requirements for capital expenditures or contractual
commitments; (ii) it does not reflect changes in, or cash
requirements for, our working capital needs; (iii) it does
not reflect income tax payments we may be required to make; and
(iv) although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized often will
have to be replaced in the future, and Adjusted EBITDA does not
reflect any cash requirements for such replacements.
To properly and prudently evaluate our business, we encourage
you to review our audited consolidated financial statements
included elsewhere in this prospectus and the reconciliation to
Adjusted EBITDA from net loss, the most directly comparable
financial measure presented in accordance with GAAP, set forth
in the table below. All of the items included in the
reconciliation from net loss to Adjusted EBITDA are either
(i) non-cash items or (ii) items that management does
not consider in assessing our on-going operating performance. In
the case of the non-cash items, management believes that
investors may find it useful to assess our comparative operating
performance because the measures without such items are less
susceptible to variances in actual performance resulting from
depreciation, amortization and other non-cash charges and more
reflective of other factors that affect operating performance.
In the case of items not considered in assessing our on-going
operating performance, management believes that investors may
find it useful to assess our operating performance if the
measures are presented without these items because their
financial impact may not reflect ongoing operating performance.
57
Results
of Operations
The following table sets forth a summary of our consolidated
statements of operations in thousands of dollars and as a
percentage of total revenue. We have derived the data for the
years ended December 31, 2008, 2009 and 2010 from the
audited consolidated financial statements included elsewhere in
this prospectus and for the three months ended March 31,
2010 and 2011 from the unaudited consolidated financial
statements included elsewhere in this prospectus. The table
below also presents a reconciliation of Adjusted EBITDA to net
loss. See Adjusted EBITDA. Amounts and
percentages in the table below have been calculated based on
unrounded numbers. Accordingly, certain amounts may not add to
the totals due to the effect of rounding.
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
For the Three Months Ended March 31,
|
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|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
|
(dollars in thousands)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
44,356
|
|
|
|
76.0
|
%
|
|
$
|
56,708
|
|
|
|
77.6
|
%
|
|
$
|
81,677
|
|
|
|
73.3
|
%
|
|
$
|
16,829
|
|
|
|
77.6
|
%
|
|
$
|
23,448
|
|
|
|
74.7
|
%
|
Professional services
|
|
|
13,219
|
|
|
|
22.7
|
|
|
|
15,056
|
|
|
|
20.6
|
|
|
|
19,639
|
|
|
|
17.6
|
|
|
|
3,342
|
|
|
|
15.4
|
|
|
|
5,721
|
|
|
|
18.2
|
|
Product sales
|
|
|
753
|
|
|
|
1.3
|
|
|
|
1,343
|
|
|
|
1.8
|
|
|
|
10,187
|
|
|
|
9.1
|
|
|
|
1,518
|
|
|
|
7.0
|
|
|
|
2,229
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
58,328
|
|
|
|
100.0
|
|
|
|
73,107
|
|
|
|
100.0
|
|
|
|
111,503
|
|
|
|
100.0
|
|
|
|
21,689
|
|
|
|
100
|
|
|
|
31,398
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and
amortization(1)
|
|
|
22,525
|
|
|
|
38.6
|
|
|
|
26,431
|
|
|
|
36.1
|
|
|
|
33,415
|
|
|
|
30.0
|
|
|
|
7,406
|
|
|
|
34.1
|
|
|
|
9,363
|
|
|
|
29.9
|
|
Product sales, excluding depreciation and amortization
|
|
|
440
|
|
|
|
0.8
|
|
|
|
481
|
|
|
|
0.7
|
|
|
|
1,715
|
|
|
|
1.5
|
|
|
|
273
|
|
|
|
1.3
|
|
|
|
508
|
|
|
|
1.6
|
|
Depreciation and amortization
|
|
|
591
|
|
|
|
1.0
|
|
|
|
718
|
|
|
|
1.0
|
|
|
|
1,403
|
|
|
|
1.3
|
|
|
|
266
|
|
|
|
1.2
|
|
|
|
450
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
23,556
|
|
|
|
40.4
|
|
|
|
27,630
|
|
|
|
37.8
|
|
|
|
36,533
|
|
|
|
32.8
|
|
|
|
7,945
|
|
|
|
36.6
|
|
|
|
10,321
|
|
|
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
34,772
|
|
|
|
59.6
|
|
|
|
45,477
|
|
|
|
62.2
|
|
|
|
74,970
|
|
|
|
67.2
|
|
|
|
13,744
|
|
|
|
63.4
|
|
|
|
21,077
|
|
|
|
67.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
6,749
|
|
|
|
11.5
|
|
|
|
9,146
|
|
|
|
12.5
|
|
|
|
20,112
|
|
|
|
18.0
|
|
|
|
3,744
|
|
|
|
17.3
|
|
|
|
6,194
|
|
|
|
19.7
|
|
Sales and marketing
|
|
|
14,059
|
|
|
|
24.1
|
|
|
|
17,388
|
|
|
|
23.8
|
|
|
|
29,264
|
|
|
|
26.2
|
|
|
|
5,753
|
|
|
|
26.5
|
|
|
|
7,122
|
|
|
|
22.7
|
|
General and administrative
|
|
|
16,030
|
|
|
|
27.5
|
|
|
|
20,511
|
|
|
|
28.0
|
|
|
|
29,602
|
|
|
|
26.6
|
|
|
|
6,491
|
|
|
|
29.9
|
|
|
|
7,002
|
|
|
|
22.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
36,838
|
|
|
|
63.1
|
|
|
|
47,045
|
|
|
|
64.3
|
|
|
|
78,978
|
|
|
|
70.8
|
|
|
|
15,988
|
|
|
|
73.7
|
|
|
|
20,318
|
|
|
|
64.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,066
|
)
|
|
|
(3.5
|
)
|
|
|
(1,568
|
)
|
|
|
(2.1
|
)
|
|
|
(4,008
|
)
|
|
|
(3.6
|
)
|
|
|
(2,244
|
)
|
|
|
(10.3
|
)
|
|
|
759
|
|
|
|
2.4
|
|
Interest expense, net
|
|
|
(151
|
)
|
|
|
(0.3
|
)
|
|
|
(112
|
)
|
|
|
(0.1
|
)
|
|
|
(87
|
)
|
|
|
(0.1
|
)
|
|
|
(36
|
)
|
|
|
(0.2
|
)
|
|
|
(8
|
)
|
|
|
0.0
|
|
Other income (loss), net
|
|
|
193
|
|
|
|
0.3
|
|
|
|
(304
|
)
|
|
|
(0.5
|
)
|
|
|
(155
|
)
|
|
|
(0.1
|
)
|
|
|
(106
|
)
|
|
|
(0.5
|
)
|
|
|
18
|
|
|
|
0.0
|
|
Gain on acquisition
|
|
|
|
|
|
|
|
|
|
|
552
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,024
|
)
|
|
|
(3.5
|
)
|
|
|
(1,432
|
)
|
|
|
(2.0
|
)
|
|
|
(4,250
|
)
|
|
|
(3.8
|
)
|
|
|
(2,386
|
)
|
|
|
(11.0
|
)
|
|
|
769
|
|
|
|
2.4
|
|
Income tax expense
|
|
|
(22
|
)
|
|
|
0.0
|
|
|
|
(114
|
)
|
|
|
(0.1
|
)
|
|
|
(372
|
)
|
|
|
(0.3
|
)
|
|
|
(78
|
)
|
|
|
(0.4
|
)
|
|
|
(110
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,046
|
)
|
|
|
(3.5
|
)%
|
|
$
|
(1,546
|
)
|
|
|
(2.1
|
)%
|
|
$
|
(4,622
|
)
|
|
|
(4.1
|
)%
|
|
$
|
(2,464
|
)
|
|
|
(11.4
|
)%
|
|
$
|
659
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of non-GAAP measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
22
|
|
|
|
N/M
|
|
|
$
|
114
|
|
|
|
0.1
|
%
|
|
$
|
372
|
|
|
|
0.3
|
%
|
|
$
|
78
|
|
|
|
0.4
|
%
|
|
$
|
110
|
|
|
|
0.3
|
%
|
Depreciation and amortization
|
|
|
2,136
|
|
|
|
3.7
|
|
|
|
3,012
|
|
|
|
4.1
|
|
|
|
4,970
|
|
|
|
4.5
|
|
|
|
1,021
|
|
|
|
4.7
|
|
|
|
1,517
|
|
|
|
4.9
|
|
Interest expense, net
|
|
|
151
|
|
|
|
0.2
|
|
|
|
112
|
|
|
|
0.1
|
|
|
|
87
|
|
|
|
0.1
|
|
|
|
36
|
|
|
|
0.2
|
|
|
|
8
|
|
|
|
0.0
|
|
Stock-based compensation
expense(2)
|
|
|
285
|
|
|
|
0.5
|
|
|
|
278
|
|
|
|
0.4
|
|
|
|
1,026
|
|
|
|
0.9
|
|
|
|
137
|
|
|
|
0.6
|
|
|
|
293
|
|
|
|
1.0
|
|
(Gain) loss on foreign currency exchange
|
|
|
(178
|
)
|
|
|
(0.3
|
)
|
|
|
259
|
|
|
|
0.4
|
|
|
|
232
|
|
|
|
0.2
|
|
|
|
84
|
|
|
|
0.4
|
|
|
|
(50
|
)
|
|
|
(0.2
|
)
|
Severance and transition
costs(3)
|
|
|
|
|
|
|
|
|
|
|
948
|
|
|
|
1.3
|
|
|
|
1,268
|
|
|
|
1.1
|
|
|
|
350
|
|
|
|
1.6
|
|
|
|
|
|
|
|
0.0
|
|
Acquisition, transaction and integration
expenses(4)
|
|
|
37
|
|
|
|
0.1
|
|
|
|
(98
|
)
|
|
|
(0.1
|
)
|
|
|
1,523
|
|
|
|
1.4
|
|
|
|
148
|
|
|
|
0.7
|
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(5)
|
|
$
|
407
|
|
|
|
0.7
|
%
|
|
$
|
3,079
|
|
|
|
4.2
|
%
|
|
$
|
4,856
|
|
|
|
4.4
|
%
|
|
$
|
(610
|
)
|
|
|
(2.8
|
)%
|
|
$
|
2,537
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M indicates the percentage is not meaningful.
|
|
|
(1)
|
|
Calculated based upon a percentage
of total subscription and professional services, as the costs to
deliver these product lines originate from the same Company
resources.
|
(2)
|
|
Represents non-cash compensation
expense.
|
|
(3)
|
|
Represents severance and transition
payments made to employees that were terminated as a result of
acquisitions and to certain members of our senior management
team whose positions were restructured in contemplation of this
offering.
|
58
|
|
|
(4)
|
|
Represents costs and expenses
associated with acquisitions, transactions and integration
activities during the period, including the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Acquisition
costs(i)
|
|
$
|
3
|
|
|
$
|
271
|
|
|
$
|
261
|
|
|
$
|
140
|
|
|
|
|
|
Transaction costs for potential
acquisitions(ii)
|
|
|
34
|
|
|
|
5
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
Financial reporting costs for acquired
companies(iii)
|
|
|
|
|
|
|
113
|
|
|
|
195
|
|
|
|
8
|
|
|
|
|
|
Lease
abandonment(iv)
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
Post acquisition purchase accounting
adjustments(v)
|
|
|
|
|
|
|
65
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
Gain on
acquisition(vi)
|
|
|
|
|
|
|
(552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition, transaction and integration expenses
|
|
$
|
37
|
|
|
$
|
(98
|
)
|
|
$
|
1,523
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Represents legal fees incurred in
connection with acquisitions during the period.
|
|
|
(ii)
|
Represents legal, accounting and
other consulting fees incurred in connection with transactions
that were not completed.
|
|
|
(iii)
|
Represents valuation services and
audits of acquired companies.
|
|
|
(iv)
|
Represents the lease abandonment
accrual for our facility in Carlsbad, California.
|
|
|
(v)
|
Represents certain adjustments
relating to the purchased assets and assumed liabilities of
Mirage Networks, BitArmor and Breach Security which we
identified subsequent to finalizing the purchase accounting for
such acquisitions.
|
|
|
(vi)
|
Represents the gain on acquisition
of Mirage Networks.
|
|
|
|
(5)
|
|
For more information regarding
Adjusted EBITDA, a non-GAAP measure, see
Adjusted EBITDA.
|
Comparison
of the Three Months Ended March 31, 2010 and 2011
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
16,829
|
|
|
|
77.6
|
%
|
|
$
|
23,448
|
|
|
|
74.7
|
%
|
|
$
|
6,619
|
|
|
|
39.3
|
%
|
Professional services
|
|
|
3,342
|
|
|
|
15.4
|
|
|
|
5,721
|
|
|
|
18.2
|
|
|
|
2,379
|
|
|
|
71.2
|
|
Product sales
|
|
|
1,518
|
|
|
|
7.0
|
|
|
|
2,229
|
|
|
|
7.1
|
|
|
|
711
|
|
|
|
46.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
21,689
|
|
|
|
100.0
|
%
|
|
$
|
31,398
|
|
|
|
100.0
|
%
|
|
$
|
9,709
|
|
|
|
44.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
18,334
|
|
|
|
84.5
|
%
|
|
$
|
25,016
|
|
|
|
79.7
|
%
|
|
$
|
6,682
|
|
|
|
36.4
|
%
|
EMEA
|
|
|
2,723
|
|
|
|
12.6
|
|
|
|
5,371
|
|
|
|
17.1
|
|
|
|
2,648
|
|
|
|
97.2
|
|
LAC
|
|
|
363
|
|
|
|
1.7
|
|
|
|
551
|
|
|
|
1.8
|
|
|
|
188
|
|
|
|
51.8
|
|
APAC
|
|
|
269
|
|
|
|
1.2
|
|
|
|
460
|
|
|
|
1.4
|
|
|
|
191
|
|
|
|
71.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
21,689
|
|
|
|
100.0
|
%
|
|
$
|
31,398
|
|
|
|
100.0
|
%
|
|
$
|
9,709
|
|
|
|
44.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue was $31.4 million in the three months ended
March 31, 2011 compared to $21.7 million in the three
months ended March 31, 2010, an increase of
$9.7 million, or 45%. Subscription revenue increased by
$6.6 million, or 39%. Revenue from our compliance
management solutions increased as a result of significant
subscriber additions from our partner network as well as our
ongoing direct sales efforts. We also increased our revenue from
the sale of compliance enablement solutions as a result of
acquiring additional customer relationships and technologies
through our acquisition of Intellitactics in 2010, as well as
increasing our customers and device counts through our own
direct sales efforts. Professional services revenue increased by
$2.4 million, or 71%, because of increased demand for our
SpiderLabs services as well as additional installation work
associated with our product sales. Product sales increased by
$0.7 million, or 47%, due to our acquisitions of
Intellitactics and Breach Security. In the three months ended
March 31, 2011, revenue generated by recently acquired
businesses through the
59
first anniversary of their respective acquisition dates was
$3.8 million. Excluding this revenue, our revenue increased
in the three months ended March 31, 2011 by 27% as compared
to our comparable revenue in 2010.
We increased revenue in the three months ended March 31,
2011 by $6.7 million, or 36%, in our largest geographic
market, North America, due to a significant increase in our
subscriber base through our partner network and direct sales
efforts and our acquisition of Intellitactics. Our EMEA revenue
increase of $2.6 million, or 97%, was related to our
acquisition of Intellitactics and a significant increase in
subscribers for our partner network.
Cost
of Sales and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
$
|
7,406
|
|
|
|
34.1
|
%
|
|
$
|
9,363
|
|
|
|
29.9
|
%
|
|
$
|
1,957
|
|
|
|
26.4
|
%
|
Product sales, excluding depreciation and amortization
|
|
|
273
|
|
|
|
1.3
|
|
|
|
508
|
|
|
|
1.6
|
|
|
|
235
|
|
|
|
86.1
|
|
Depreciation and amortization
|
|
|
266
|
|
|
|
1.2
|
|
|
|
450
|
|
|
|
1.4
|
|
|
|
184
|
|
|
|
69.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
7,945
|
|
|
|
36.6
|
%
|
|
|
10,321
|
|
|
|
32.9
|
%
|
|
|
2,376
|
|
|
|
29.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
13,744
|
|
|
|
63.4
|
%
|
|
$
|
21,077
|
|
|
|
67.1
|
%
|
|
$
|
7,333
|
|
|
|
53.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales was $10.3 million in the three months ended
March 31, 2011 compared to $7.9 million in the three
months ended March 31, 2010, an increase of
$2.4 million, or 30%. Cost of sales as a percent of revenue
declined from 37% in the three months ended March 31, 2010
to 33% in the three months ended March 31, 2011. The
decrease in cost of sales as a percent of revenue resulted from
higher revenue and, to a lesser extent, a change of revenue mix
towards higher margin products. Service delivery cost increased
$2.0 million, or 26%, primarily as a result of a
$1.7 million, or 26%, increase in salary and associated
employee expense for tax, benefits, bonus, travel and
entertainment. There was also an increase of $0.1 million
due to increased use of outsourced call center capabilities. The
increase in employees and associated expense is due to ramping
up our delivery and support capabilities to support our customer
and product revenue growth.
Product sales cost increased $0.2 million, or 86%, as a
result of our increased product sales related to security
information & event management and web application
firewall solution, and their associated hardware and other costs.
Depreciation and amortization expense increased
$0.2 million as a result of a $0.1 million increase in
depreciation expense for customer premise equipment and a
$0.1 million increase in amortization expense due to our
2010 acquisitions.
Gross profit increased to $21.1 million in the three months
ended March 31, 2011 compared to $13.7 million in the
three months ended March 31, 2010, an increase of
$7.3 million, or 53%, as a result of the benefits of
economies of being a larger organization and, to a lesser
extent, a change of revenue mix towards higher margin products.
60
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
3,744
|
|
|
|
17.3
|
%
|
|
$
|
6,194
|
|
|
|
19.7
|
%
|
|
$
|
2,450
|
|
|
|
65.4
|
%
|
Sales and marketing
|
|
|
5,753
|
|
|
|
26.5
|
|
|
|
7,122
|
|
|
|
22.7
|
|
|
|
1,369
|
|
|
|
23.8
|
|
General and administrative
|
|
|
6,491
|
|
|
|
29.9
|
|
|
|
7,002
|
|
|
|
22.3
|
|
|
|
511
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
15,988
|
|
|
|
73.7
|
%
|
|
$
|
20,318
|
|
|
|
64.7
|
%
|
|
$
|
4,330
|
|
|
|
27.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Development. Product development
expenses increased by $2.5 million, or 65%, in the three
months ended March 31, 2011, related to headcount expansion
both from integrating the development teams from the three
companies we acquired in 2010, as well as other hiring. Salary
and associated employee expense increased $2.1 million, or
59%. There was also an increase of $0.2 million in the use
of temporary employees on a project basis and an increase of
$0.1 million in other costs.
Sales and Marketing. Sales and marketing
expenses increased by $1.4 million, or 24%, in the three
months ended March 31, 2011, as a result of our retaining
sales resources from our 2010 acquisitions and ongoing hiring.
Employee related expense, excluding commissions and referral
fees, increased by $0.7 million, or 20%. Commissions and
referral fees increased by $0.4 million, or 24%, the result
of increased sales period to period that included a higher
percentage of product sales. Third party marketing expense
increased by $0.3 million as a result of increased presence
at industry trade shows and similar events.
General and Administrative. General and
administrative expenses increased by $0.5 million, or 8%,
in the three months ended March 31, 2011. This increase was
due to an increase in employee related expense of
$0.1 million, or 5%, from hiring in 2010 to support our
infrastructure build out. Real estate costs increased by $0.3 as
we increased our rental space, and utilities and
telecommunications costs increased by $0.1 million to
$0.4 million in the three months ended March 31, 2011
due to expanding our offices and upgrading our systems. These
increases were offset by a decrease in bad debt expense of
$0.4 million as we experienced fewer collections
difficulties. Depreciation and amortization expense increased
$0.3 million as a result of increased capital expenditures.
Other
Income (Loss), Net
Other income (loss), net was income of $0.02 million in the
three months ended March 31, 2011 compared to an expense of
$0.1 million in the three months ended March 31, 2010.
The change was the result of an improvement in our foreign
currency exchange rates and other income of $0.1 million.
Income
Tax Expense
We recorded an income tax expense of $0.08 million in the
three months ended March 31, 2010 as compared to
$0.1 million in the three months ended March 31, 2011.
We had an effective tax expense rate of 14.3% for the three
months ended March 31, 2011 and (3.3)% in the three months
ended March 31, 2010.
61
Adjusted
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Segment Reported Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
(162
|
)
|
|
|
(0.7
|
)%
|
|
$
|
2,931
|
|
|
|
9.3
|
%
|
|
$
|
3,093
|
|
|
|
N/M
|
|
EMEA
|
|
|
189
|
|
|
|
0.9
|
|
|
|
265
|
|
|
|
0.8
|
|
|
|
76
|
|
|
|
40.2
|
|
LAC
|
|
|
(256
|
)
|
|
|
(1.2
|
)
|
|
|
(556
|
)
|
|
|
(1.8
|
)
|
|
|
(300
|
)
|
|
|
117.2
|
|
APAC
|
|
|
(381
|
)
|
|
|
(1.8
|
)
|
|
|
(103
|
)
|
|
|
(0.3
|
)
|
|
|
278
|
|
|
|
(73.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjusted
EBITDA(1)
|
|
$
|
(610
|
)
|
|
|
(2.8
|
)%
|
|
$
|
2,537
|
|
|
|
8.1
|
%
|
|
$
|
3,147
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(78
|
)
|
|
|
(0.4
|
)%
|
|
$
|
(110
|
)
|
|
|
(0.4
|
)%
|
|
$
|
(32
|
)
|
|
|
(41.0
|
)%
|
Depreciation and amortization
|
|
|
(1,021
|
)
|
|
|
(4.7
|
)
|
|
|
(1,517
|
)
|
|
|
(4.8
|
)
|
|
|
(496
|
)
|
|
|
(48.6
|
)
|
Interest expense, net
|
|
|
(36
|
)
|
|
|
(0.2
|
)
|
|
|
(8
|
)
|
|
|
0.0
|
|
|
|
28
|
|
|
|
77.8
|
|
Stock-based compensation
expense(2)
|
|
|
(137
|
)
|
|
|
(0.6
|
)
|
|
|
(293
|
)
|
|
|
(0.9
|
)
|
|
|
(156
|
)
|
|
|
(113.9
|
)
|
Gain (loss) on foreign currency exchange
|
|
|
(84
|
)
|
|
|
(0.4
|
)
|
|
|
50
|
|
|
|
0.2
|
|
|
|
134
|
|
|
|
159.5
|
|
Severance and transition costs
|
|
|
(350
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
0.0
|
|
|
|
350
|
|
|
|
N/M
|
|
Acquisition transaction and integration
expenses(3)
|
|
|
(148
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
0.0
|
|
|
|
148
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,464
|
)
|
|
|
(11.4
|
)%
|
|
$
|
659
|
|
|
|
2.1
|
%
|
|
$
|
3,123
|
|
|
|
126.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M indicates the percentage is not meaningful.
|
|
|
(1)
|
|
For more information regarding
Adjusted EBITDA, a non-GAAP measure, see Results of
Operations and Adjusted EBITDA.
|
|
|
|
(2)
|
|
Represents non-cash compensation
expense.
|
|
|
|
(3)
|
|
Represents costs and expenses
associated with acquisitions, integration activities and
restructuring during the period, including legal, diligence and
audit expenses, severance expenses and restructuring charges.
For more information, see Recent Acquisitions.
|
Adjusted EBITDA increased by $3.1 million in the three
months ended March 31, 2011 to $2.5 million as a
result of our gross profit excluding depreciation and
amortization increasing by $7.5 million, or 54%, largely
due to our increase in subscribers in North America and the
effects of our 2010 acquisitions. This was partially offset by a
net increase of $4.4 million in operating expenses
excluding depreciation and amortization, stock-based
compensation and acquisition, transaction, integration and
severance costs, that resulted from increased hiring, additional
sales and marketing activities to support our revenue growth and
other factors.
62
Comparison
of the Years Ended December 31, 2009 and 2010
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Period-to-Period Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
56,708
|
|
|
|
77.6
|
%
|
|
$
|
81,677
|
|
|
|
73.3
|
%
|
|
$
|
24,969
|
|
|
|
44.0
|
%
|
Professional services
|
|
|
15,056
|
|
|
|
20.6
|
|
|
|
19,639
|
|
|
|
17.6
|
|
|
|
4,583
|
|
|
|
30.4
|
|
Product sales
|
|
|
1,343
|
|
|
|
1.8
|
|
|
|
10,187
|
|
|
|
9.1
|
|
|
|
8,844
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
73,107
|
|
|
|
100.0
|
%
|
|
$
|
111,503
|
|
|
|
100.0
|
%
|
|
$
|
38,396
|
|
|
|
52.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
61,936
|
|
|
|
84.7
|
%
|
|
$
|
94,706
|
|
|
|
84.9
|
%
|
|
$
|
32,770
|
|
|
|
52.9
|
%
|
EMEA
|
|
|
9,957
|
|
|
|
13.6
|
|
|
|
13,509
|
|
|
|
12.1
|
|
|
|
3,552
|
|
|
|
35.7
|
|
LAC
|
|
|
579
|
|
|
|
0.8
|
|
|
|
1,980
|
|
|
|
1.8
|
|
|
|
1,401
|
|
|
|
N/M
|
|
APAC
|
|
|
635
|
|
|
|
0.9
|
|
|
|
1,308
|
|
|
|
1.2
|
|
|
|
673
|
|
|
|
106.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
73,107
|
|
|
|
100.0
|
%
|
|
$
|
111,503
|
|
|
|
100.0
|
%
|
|
$
|
38,396
|
|
|
|
52.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M indicates the percentage is not meaningful.
Revenue was $111.5 million in 2010 compared to
$73.1 million in 2009, an increase of $38.4 million,
or 53%. Subscription revenue increased by $25.0 million, or
44%, due to several factors. We increased our subscription
revenue from the sale of our compliance management solutions as
a result of a significant increase in our subscribers from our
partner network as well as our ongoing direct sales efforts. We
also increased our revenue from the sale of compliance
enablement solutions as a result of acquiring additional
customer relationships and technologies through our acquisition
of Intellitactics in 2010, as well as increasing our customers
and device counts through our own direct sales efforts.
Professional services revenue increased by $4.6 million, or
30%, because of increased demand for our SpiderLabs services as
well as additional installation work associated with our product
sales. Product sales increased by $8.8 million,
$6.7 million of which was due to our acquisition of
Intellitactics. In 2010, revenue generated by recently acquired
businesses through the first anniversary of their respective
acquisition dates was $19.2 million. Excluding this
revenue, our revenue increased in 2010 by 26% as compared to our
comparable revenue in 2009.
We increased revenue in 2010 by $32.8 million, or 53%, in
our largest geographic market, North America, due to a
significant increase in our subscriber base through our partner
network and direct sales efforts and our acquisition of
Intellitactics. Our EMEA revenue increase was related to an
increase in subscribers for our partner network.
63
Cost
of Sales and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Period-to-Period Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
$
|
26,431
|
|
|
|
36.1
|
%
|
|
$
|
33,415
|
|
|
|
30.0
|
%
|
|
$
|
6,984
|
|
|
|
26.4
|
%
|
Product sales, excluding depreciation and amortization
|
|
|
481
|
|
|
|
0.7
|
|
|
|
1,715
|
|
|
|
1.5
|
|
|
|
1,234
|
|
|
|
N/M
|
|
Depreciation and amortization
|
|
|
718
|
|
|
|
1.0
|
|
|
|
1,403
|
|
|
|
1.3
|
|
|
|
685
|
|
|
|
95.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
27,630
|
|
|
|
37.8
|
%
|
|
|
36,533
|
|
|
|
32.8
|
%
|
|
|
8,903
|
|
|
|
32.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
45,477
|
|
|
|
62.2
|
%
|
|
$
|
74,970
|
|
|
|
67.2
|
%
|
|
$
|
29,493
|
|
|
|
64.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M indicates that the percentage is not meaningful.
Cost of sales was $36.5 million in 2010 compared to
$27.6 million in 2009, an increase of $8.9 million, or
32%. Cost of sales as a percent of revenue declined from 38% in
2009 to 33% in 2010. Service delivery cost increased
$7.0 million, or 26%, primarily as a result of
$5.8 million, or 25%, increase in salary and associated
employee expense for tax, benefits, bonus, travel and
entertainment expense. There was also an increase of $0.5
million due to increased use of outsourced call center
capabilities. The increase in employees and associated expense
is due to ramping up our delivery and support capabilities to
support our customer and product growth.
Product sales cost increased $1.2 million as a result of
our increased product sales related to our security
information & event management, web application
firewall and network access control solutions, and their
associated hardware and other costs.
Depreciation and amortization expense increased
$0.7 million as a result of a $0.2 million increase in
depreciation expense for customer premise equipment and a
$0.5 million increase in amortization expense primarily due
to our 2010 acquisitions.
Gross profit increased to $75.0 million in 2010 compared to
$45.5 million in 2009, an increase of $29.5 million,
or 65%, as our revenue mix moved towards higher margin products
and other offerings and the benefits of economies of being a
larger organization.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Period-to-Period Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
9,146
|
|
|
|
12.5
|
%
|
|
$
|
20,112
|
|
|
|
18.0
|
%
|
|
$
|
10,966
|
|
|
|
119.9
|
%
|
Sales and marketing
|
|
|
17,388
|
|
|
|
23.8
|
|
|
|
29,264
|
|
|
|
26.2
|
|
|
|
11,876
|
|
|
|
68.3
|
|
General and administrative
|
|
|
20,511
|
|
|
|
28.0
|
|
|
|
29,602
|
|
|
|
26.6
|
|
|
|
9,091
|
|
|
|
44.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
47,045
|
|
|
|
64.3
|
%
|
|
$
|
78,978
|
|
|
|
70.8
|
%
|
|
$
|
31,933
|
|
|
|
67.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Development. Product development
expenses increased by $11.0 million, or 120% as a result of
headcount expansion both from integrating the development teams
from the three companies we acquired in 2010, as well as other
hiring. Salary and associated employee expense increased
$10.2 million, or 114%. There was also
64
an increase of $0.3 million in the use of temporary
employees on a project basis and an increase of
$0.5 million in other costs.
Sales and Marketing. Sales and marketing
expenses increased by $11.9 million, or 68%, as a result of
our retaining sales resources from our 2010 acquisitions.
Employee related expense, excluding commissions and referral
fees, increased by $6.0 million, or 60%. Commissions and
referral fees increased by $4.3 million, or 76%, primarily
the result of legacy commission plans from the acquired entities
and increased product sales of $8.8 million compared to the
prior year. Third party marketing expense increased by
$1.1 million as a result of increased advertising and
presence at industry trade shows and similar events.
General and Administrative. General and
administrative expenses increased by $9.1 million, or 44%.
This increase was due to an increase in employee related expense
of $2.5 million, or 33%, as a result of hiring employees in
our finance, human resource and IT departments. There was also
an increase of $1.2 million in legal, accounting and third
party support fees related to our three acquisitions in 2010.
Real estate costs increased by $1.1 million, which includes
a write-off of $0.3 million related to an office we closed
after an acquisition. Bad debt expense increased by
$0.8 million to $1.5 million in 2010 as a result of
the associated increase in our revenue and the broader
geographic scope of our subscriber base. Telecommunications
costs increased by $0.9 million to $1.7 million in
2010 primarily due to hiring employees, office expansion and
upgrading our systems. Certain gross receipt tax expenses
increased by $0.5 million to $0.6 million in 2010 as a
result of filing in more tax jurisdictions. Depreciation and
amortization expense increased $1.3 million primarily as a
result of capital expenditures and the acquisitions completed in
2010.
Other
Income (Loss), Net
Other income (loss), net was a loss of $0.2 million in 2010
compared to an expense of $0.3 million in 2009. The change
was the result of an improvement in our foreign currency
exchange rates and other income of $0.1 million.
Income
Tax Expense
We recorded an income tax expense of $0.1 million in 2009
as compared to $0.4 million in 2010. We had an effective
tax expense rate of (8.0)% for 2009 and (8.8)% in 2010. For
2010, we applied a valuation allowance against certain of our
deferred tax assets, including net operating loss carry
forwards, which reduced the effective tax benefit rate from the
expected statutory rate. In accordance with authoritative
accounting guidance, a valuation allowance is required unless it
is more likely than not that future taxable income or the
reversal of deferred tax liabilities will be sufficient to
recover deferred tax assets. In addition, certain state taxes
are calculated on bases different than pre-tax loss. This
resulted in us recording income tax expense for these states,
which also lowered our effective tax benefit rate in 2009 and
2010 compared to the statutory rate.
65
Adjusted
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
Period-to-Period
|
|
|
|
2009
|
|
|
2010
|
|
|
Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Segment Reported Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
4,175
|
|
|
|
5.7
|
%
|
|
$
|
7,111
|
|
|
|
6.4
|
%
|
|
$
|
2,936
|
|
|
|
70.3
|
%
|
EMEA
|
|
|
329
|
|
|
|
0.5
|
|
|
|
492
|
|
|
|
0.4
|
|
|
|
163
|
|
|
|
49.5
|
|
LAC
|
|
|
(624
|
)
|
|
|
(0.9
|
)
|
|
|
(1,817
|
)
|
|
|
(1.6
|
)
|
|
|
(1,193
|
)
|
|
|
191.2
|
|
APAC
|
|
|
(801
|
)
|
|
|
(1.1
|
)
|
|
|
(930
|
)
|
|
|
(0.8
|
)
|
|
|
(129
|
)
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjusted
EBITDA(1)
|
|
$
|
3,079
|
|
|
|
4.2
|
%
|
|
$
|
4,856
|
|
|
|
4.4
|
%
|
|
$
|
1,777
|
|
|
|
57.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(114
|
)
|
|
|
(0.1
|
)%
|
|
$
|
(372
|
)
|
|
|
(0.3
|
)%
|
|
$
|
(258
|
)
|
|
|
N/M
|
|
Depreciation and amortization
|
|
|
(3,012
|
)
|
|
|
(4.1
|
)
|
|
|
(4,970
|
)
|
|
|
(4.5
|
)
|
|
|
(1,958
|
)
|
|
|
65.0
|
|
Interest expense, net
|
|
|
(112
|
)
|
|
|
(0.1
|
)
|
|
|
(87
|
)
|
|
|
(0.1
|
)
|
|
|
25
|
|
|
|
(22.3
|
)
|
Stock-based compensation
expense(2)
|
|
|
(278
|
)
|
|
|
(0.4
|
)
|
|
|
(1,026
|
)
|
|
|
(0.9
|
)
|
|
|
(748
|
)
|
|
|
N/M
|
|
Gain (loss) on foreign currency exchange
|
|
|
(259
|
)
|
|
|
(0.4
|
)
|
|
|
(232
|
)
|
|
|
(0.2
|
)
|
|
|
27
|
|
|
|
(10.4
|
)
|
Severance and transition costs
|
|
|
(948
|
)
|
|
|
(1.3
|
)
|
|
|
(1,268
|
)
|
|
|
(1.1
|
)
|
|
|
(320
|
)
|
|
|
33.8
|
|
Acquisition transaction and integration
expenses(3)
|
|
|
98
|
|
|
|
0.1
|
|
|
|
(1,523
|
)
|
|
|
(1.4
|
)
|
|
|
(1,621
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,546
|
)
|
|
|
(2.1
|
)%
|
|
$
|
(4,622
|
)
|
|
|
(4.1
|
)%
|
|
$
|
(3,076
|
)
|
|
|
199.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M indicates the
percentage is not meaningful.
|
|
|
(1)
|
|
For more information regarding
Adjusted EBITDA, a non-GAAP measure, see Results of
Operations and Adjusted EBITDA.
|
|
|
|
(2)
|
|
Represents non-cash compensation
expense.
|
|
|
|
(3)
|
|
Represents costs and expenses
associated with acquisitions, integration activities and
restructuring during the period, including legal, diligence and
audit expenses, severance expenses and restructuring charges.
For more information, see Recent Acquisitions.
|
Adjusted EBITDA increased by $1.8 million, or 58%, to
$4.9 million as a result of our gross profit excluding
depreciation and amortization increasing by $30.2 million,
or 65%, largely due to our increase in subscribers in North
America and our acquisitions during the period. This was offset
by a net increase of $27.9 million in operating expenses
excluding depreciation and amortization, stock-based
compensation and acquisition, transaction, integration and
severance costs, that resulted from increased hiring, additional
sales and marketing activities to support our revenue growth and
other factors.
66
Comparison
of the Years Ended December 31, 2008 and 2009
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Period-to-Period Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
44,356
|
|
|
|
76.0
|
%
|
|
$
|
56,708
|
|
|
|
77.6
|
%
|
|
$
|
12,352
|
|
|
|
27.8
|
%
|
Professional services
|
|
|
13,219
|
|
|
|
22.7
|
|
|
|
15,056
|
|
|
|
20.6
|
|
|
|
1,837
|
|
|
|
13.9
|
|
Product sales
|
|
|
753
|
|
|
|
1.3
|
|
|
|
1,343
|
|
|
|
1.8
|
|
|
|
590
|
|
|
|
78.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
58,328
|
|
|
|
100.0
|
%
|
|
$
|
73,107
|
|
|
|
100.0
|
%
|
|
$
|
14,779
|
|
|
|
25.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
47,932
|
|
|
|
82.2
|
%
|
|
$
|
61,936
|
|
|
|
84.7
|
%
|
|
$
|
14,004
|
|
|
|
29.2
|
%
|
EMEA
|
|
|
9,640
|
|
|
|
16.5
|
|
|
|
9,957
|
|
|
|
13.6
|
|
|
|
317
|
|
|
|
3.3
|
|
LAC
|
|
|
268
|
|
|
|
0.5
|
|
|
|
579
|
|
|
|
0.8
|
|
|
|
311
|
|
|
|
116.0
|
|
APAC
|
|
|
488
|
|
|
|
0.8
|
|
|
|
635
|
|
|
|
0.9
|
|
|
|
147
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
58,328
|
|
|
|
100.0
|
%
|
|
$
|
73,107
|
|
|
|
100.0
|
%
|
|
$
|
14,779
|
|
|
|
25.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue was $73.1 million in 2009 compared to
$58.3 million in 2008, an increase of $14.8 million,
or 25%. Subscription revenue increased by $12.4 million, or
28%, primarily as a result of a substantial increase in our
revenue from sales of our compliance management solutions
through our successful expansion into the SMB market through our
partner network in 2009. Professional services revenue increased
by $1.8 million, or 14%, because of increased demand for
our services work as well as additional installation work
associated with our product sales. Product sales increased by
$0.6 million as a result of the acquisition of Mirage
Networks. In 2009, revenue generated by recently acquired
businesses through the first anniversary of their respective
acquisition dates was $3.4 million. Excluding this revenue,
our revenue increased in 2009 by 20% as compared to our
comparable revenue in 2008.
Revenue increased $14.0 million, or 29%, in our largest
geographic market, North America, due to our successful
expansion into the SMB market through our partner network and
acquisitions we completed in 2009.
Cost
of Sales and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Period-to-Period Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
$
|
22,525
|
|
|
|
38.6
|
%
|
|
$
|
26,431
|
|
|
|
36.1
|
%
|
|
$
|
3,906
|
|
|
|
17.3
|
%
|
Product sales, excluding depreciation and amortization
|
|
|
440
|
|
|
|
0.8
|
|
|
|
481
|
|
|
|
0.7
|
|
|
|
41
|
|
|
|
9.3
|
|
Depreciation and amortization
|
|
|
591
|
|
|
|
1.0
|
|
|
|
718
|
|
|
|
1.0
|
|
|
|
127
|
|
|
|
21.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
23,556
|
|
|
|
40.4
|
%
|
|
$
|
27,630
|
|
|
|
37.8
|
%
|
|
$
|
4,074
|
|
|
|
17.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
34,772
|
|
|
|
59.6
|
%
|
|
$
|
45,477
|
|
|
|
62.2
|
%
|
|
$
|
10,705
|
|
|
|
30.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales was $27.6 million in 2009 compared to
$23.6 million in 2008, an increase of $4.1 million, or
17%. Cost of sales as a percent of revenue declined from 40% in
2008 to 38% in 2009. Service delivery cost increased
$3.9 million, or 17%, as a result of $3.7 million, or
19%, increase in salary and associated employee expense for tax,
67
benefits, bonus, travel and entertainment expense and a
$0.1 million increase in data licenses and other costs to
support our compliance enablement solutions. The increase in
employees and associated expense is due to ramping up our
delivery and support capabilities to support our customer and
product growth.
Product sales cost increased $0.04 million, or 9%, as a
result of increased hardware costs related to increased sales.
Depreciation and amortization expense increased
$0.1 million as a result of an increase in depreciation
expense for customer premise equipment and an increase in
amortization expense due to our 2009 acquisitions.
Gross profit increased to $45.5 million in 2009 compared to
$34.8 million in 2008, an increase of $10.7 million,
or 31%, as our revenue mix moved towards higher margin solutions
and we experienced economies of scale from our revenue growth.
Our gross margin increased from 60% in 2008 to 62% 2009.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Period-to-Period Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
6,749
|
|
|
|
11.5
|
%
|
|
$
|
9,146
|
|
|
|
12.5
|
%
|
|
$
|
2,397
|
|
|
|
35.5
|
%
|
Sales and marketing
|
|
|
14,059
|
|
|
|
24.1
|
|
|
|
17,388
|
|
|
|
23.8
|
|
|
|
3,329
|
|
|
|
23.7
|
|
General and administrative
|
|
|
16,030
|
|
|
|
27.5
|
|
|
|
20,511
|
|
|
|
28.0
|
|
|
|
4,481
|
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
36,838
|
|
|
|
63.1
|
%
|
|
$
|
47,045
|
|
|
|
64.3
|
%
|
|
$
|
10,207
|
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Development. Product development
expenses increased $2.4 million, or 36%, related to hiring
additional employees as well as adding the development teams
from two companies we acquired in 2009. Salary and associated
employee expense increased $2.6 million, or 41%, which was
offset by a $0.2 million reduction in outside consultants
costs.
Sales and Marketing. Sales and marketing
expenses increased by $3.3 million, or 24% as a result of
retaining sales personnel from our 2009 acquisitions and hiring.
Employee related expenses, excluding commission expense and
referral fees, increased by $2.0 million, or 24%.
Commission expense and referral fees increased by
$1.3 million, or 28%, as a result of increased sales
activity. Third party marketing expense increased by
$0.1 million as a result of increased advertising and
presence at industry trade shows and similar events, which was
partially offset by a $0.1 million reduction in expense
associated with third party consultants and miscellaneous other
expense.
General and Administrative. General and
administrative expenses increased by $4.5 million, or 28%,
in 2009. This increase was due to an increase in
employee-related expense of $1.0 million, or 16%, primarily
as a result of hiring employees in finance and other support
groups. There was also an increase of $1.0 million in
legal, accounting and third party fees directly related to the
two acquisitions. Real estate and other facilities related costs
increased by $1.5 million as we expanded our headquarters
in Chicago. Bad debt expense increased by $0.2 million as
our business and our associated accounts receivable increased.
Depreciation and amortization expense increased
$0.9 million primarily due to increased equipment and
leasehold improvement depreciation.
Other
Income (Loss), Net
Other income (loss), net was a loss of $0.3 million in 2009
compared to income of $0.2 million in 2008. The change was
the result of a change in foreign currency exchange rates.
68
Income
Tax Expense
We recorded an income tax expense of $0.1 million and
$0.02 million in 2009 and 2008, respectively. We had an
effective tax expense rate was (8.0)% for 2009 and (1.0)% in
2008. Our effective tax rate differs substantially from the
federal statutory rate primarily due to the application of a
valuation allowance that reduced the recognized benefit of our
deferred tax assets. In addition, certain state income taxes are
calculated on bases different than pre-tax income (loss). This
resulted in recording income tax expense in certain states that
experience a pre-tax loss.
Adjusted
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Period-to-Period Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Segment Reported Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
959
|
|
|
|
1.6
|
%
|
|
$
|
4,175
|
|
|
|
5.7
|
%
|
|
$
|
3,216
|
|
|
|
N/M
|
|
EMEA
|
|
|
8
|
|
|
|
N/M
|
|
|
|
329
|
|
|
|
0.5
|
|
|
|
321
|
|
|
|
N/M
|
|
LAC
|
|
|
(254
|
)
|
|
|
(0.4
|
)
|
|
|
(624
|
)
|
|
|
(0.9
|
)
|
|
|
(370
|
)
|
|
|
145.7
|
|
APAC
|
|
|
(306
|
)
|
|
|
(0.5
|
)
|
|
|
(801
|
)
|
|
|
(1.1
|
)
|
|
|
(495
|
)
|
|
|
161.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjusted
EBITDA(1)
|
|
$
|
407
|
|
|
|
0.7
|
%
|
|
$
|
3,079
|
|
|
|
4.2
|
%
|
|
$
|
2,672
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(22
|
)
|
|
|
N/M
|
|
|
$
|
(114
|
)
|
|
|
(0.1
|
)%
|
|
$
|
(92
|
)
|
|
|
N/M
|
|
Depreciation and amortization
|
|
|
(2,136
|
)
|
|
|
(3.7
|
)
|
|
|
(3,012
|
)
|
|
|
(4.1
|
)
|
|
|
(876
|
)
|
|
|
41.0
|
|
Interest expense, net
|
|
|
(151
|
)
|
|
|
(0.2
|
)
|
|
|
(112
|
)
|
|
|
(0.1
|
)
|
|
|
39
|
|
|
|
(25.8
|
)
|
Stock-based compensation
expense(2)
|
|
|
(285
|
)
|
|
|
(0.5
|
)
|
|
|
(278
|
)
|
|
|
(0.4
|
)
|
|
|
7
|
|
|
|
(2.5
|
)
|
Gain (loss) on foreign currency exchange
|
|
|
178
|
|
|
|
0.3
|
|
|
|
(259
|
)
|
|
|
(0.4
|
)
|
|
|
(437
|
)
|
|
|
N/M
|
|
Severance and transition costs
|
|
|
|
|
|
|
|
|
|
|
(948
|
)
|
|
|
(1.3
|
)
|
|
|
(948
|
)
|
|
|
N/M
|
|
Acquisition transaction and integration
expenses(3)
|
|
|
(37
|
)
|
|
|
(0.1
|
)
|
|
|
98
|
|
|
|
0.1
|
|
|
|
135
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,046
|
)
|
|
|
(3.5
|
)%
|
|
$
|
(1,546
|
)
|
|
|
(2.1
|
)%
|
|
$
|
500
|
|
|
|
(24.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M indicates the percentage is not meaningful.
|
|
|
(1)
|
|
For more information regarding
Adjusted EBITDA, a non-GAAP measure, see Results of
Operations and Adjusted EBITDA.
|
(2)
|
|
Represents non-cash compensation
expense.
|
|
|
|
(3)
|
|
Represents costs and expenses
associated with acquisitions, integration activities and
restructuring during the period, including legal, diligence and
audit expenses, severance expenses and restructuring charges.
For more information, see Recent Acquisitions.
|
Adjusted EBITDA increased by $2.7 million to
$3.1 million as a result of gross profit excluding
depreciation and amortization increasing by $10.8 million,
or 31%, due to increased traction with our enterprise customers
and subscribers in North America. This was offset by a net
increase of $8.6 million in operating expenses excluding
depreciation and amortization, stock-based compensation and
acquisition, transaction, integration and severance costs that
resulted from increased hiring, sales and marketing activities
and infrastructure expansion.
Quarterly
Results of Operations
The following table sets forth unaudited selected quarterly
operating results for 2009 and 2010. In the opinion of our
management, the following selected quarterly information
includes all adjustments, consisting solely of normal recurring
adjustments, necessary for the fair statement of the results of
operations for these periods. This information should be read in
conjunction with our financial statements and related notes
included elsewhere in this prospectus. These quarterly operating
results are not necessarily indicative of our operating results
for any future period.
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
12,660
|
|
|
$
|
13,581
|
|
|
$
|
14,651
|
|
|
$
|
15,816
|
|
|
$
|
16,829
|
|
|
$
|
19,559
|
|
|
$
|
21,683
|
|
|
$
|
23,606
|
|
Professional services
|
|
|
3,454
|
|
|
|
3,684
|
|
|
|
3,221
|
|
|
|
4,697
|
|
|
|
3,342
|
|
|
|
4,708
|
|
|
|
5,341
|
|
|
|
6,248
|
|
Product sales
|
|
|
140
|
|
|
|
468
|
|
|
|
247
|
|
|
|
488
|
|
|
|
1,518
|
|
|
|
2,424
|
|
|
|
3,720
|
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
16,254
|
|
|
|
17,733
|
|
|
|
18,119
|
|
|
|
21,001
|
|
|
|
21,689
|
|
|
|
26,691
|
|
|
|
30,744
|
|
|
|
32,379
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
|
6,289
|
|
|
|
6,585
|
|
|
|
6,738
|
|
|
|
6,819
|
|
|
|
7,405
|
|
|
|
8,282
|
|
|
|
8,782
|
|
|
|
8,946
|
|
Product sales
|
|
|
84
|
|
|
|
99
|
|
|
|
102
|
|
|
|
196
|
|
|
|
273
|
|
|
|
577
|
|
|
|
537
|
|
|
|
328
|
|
Depreciation and amortization
|
|
|
156
|
|
|
|
170
|
|
|
|
186
|
|
|
|
206
|
|
|
|
266
|
|
|
|
342
|
|
|
|
388
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
6,529
|
|
|
|
6,854
|
|
|
|
7,026
|
|
|
|
7,221
|
|
|
|
7,944
|
|
|
|
9,201
|
|
|
|
9,707
|
|
|
|
9,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
9,725
|
|
|
$
|
10,879
|
|
|
$
|
11,093
|
|
|
$
|
13,780
|
|
|
$
|
13,745
|
|
|
$
|
17,490
|
|
|
$
|
21,037
|
|
|
$
|
22,698
|
|
Gross profit as a % of revenue:
|
|
|
59.8
|
%
|
|
|
61.3
|
%
|
|
|
61.2
|
%
|
|
|
65.6
|
%
|
|
|
63.4
|
%
|
|
|
65.5
|
%
|
|
|
68.4
|
%
|
|
|
70.1
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
2,079
|
|
|
$
|
2,211
|
|
|
$
|
2,286
|
|
|
$
|
2,570
|
|
|
$
|
3,744
|
|
|
$
|
4,941
|
|
|
$
|
5,610
|
|
|
$
|
5,817
|
|
Sales and marketing
|
|
|
3,935
|
|
|
|
4,413
|
|
|
|
4,202
|
|
|
|
4,838
|
|
|
|
5,753
|
|
|
|
6,877
|
|
|
|
7,689
|
|
|
|
8,945
|
|
General and administrative
|
|
|
5,360
|
|
|
|
4,622
|
|
|
|
5,190
|
|
|
|
5,339
|
|
|
|
6,491
|
|
|
|
7,268
|
|
|
|
8,161
|
|
|
|
7,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,374
|
|
|
|
11,246
|
|
|
|
11,678
|
|
|
|
12,747
|
|
|
|
15,988
|
|
|
|
19,086
|
|
|
|
21,460
|
|
|
|
22,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) from operations
|
|
|
(1,649
|
)
|
|
|
(367
|
)
|
|
|
(585
|
)
|
|
|
1,033
|
|
|
|
(2,243
|
)
|
|
|
(1,596
|
)
|
|
|
(423
|
)
|
|
|
254
|
|
Interest (expense), net
|
|
|
(27
|
)
|
|
|
(19
|
)
|
|
|
(24
|
)
|
|
|
(42
|
)
|
|
|
(36
|
)
|
|
|
(24
|
)
|
|
|
(12
|
)
|
|
|
(15
|
)
|
Other income (loss), net
|
|
|
(181
|
)
|
|
|
(35
|
)
|
|
|
(79
|
)
|
|
|
(9
|
)
|
|
|
(106
|
)
|
|
|
(108
|
)
|
|
|
(110
|
)
|
|
|
169
|
|
Gain on acquisition
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before income taxes
|
|
|
(1,305
|
)
|
|
|
(421
|
)
|
|
|
(688
|
)
|
|
|
982
|
|
|
|
(2,385
|
)
|
|
|
(1,728
|
)
|
|
|
(545
|
)
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense)
|
|
|
(25
|
)
|
|
|
(22
|
)
|
|
|
(33
|
)
|
|
|
(34
|
)
|
|
|
(78
|
)
|
|
|
(50
|
)
|
|
|
(23
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss)
|
|
|
(1,330
|
)
|
|
|
(443
|
)
|
|
|
(721
|
)
|
|
|
948
|
|
|
|
(2,463
|
)
|
|
|
(1,778
|
)
|
|
|
(568
|
)
|
|
|
188
|
|
Taxes
|
|
|
25
|
|
|
|
22
|
|
|
|
33
|
|
|
|
34
|
|
|
|
78
|
|
|
|
50
|
|
|
|
23
|
|
|
|
220
|
|
Depreciation and amortization
|
|
|
694
|
|
|
|
699
|
|
|
|
781
|
|
|
|
838
|
|
|
|
1,021
|
|
|
|
1,215
|
|
|
|
1,331
|
|
|
|
1,403
|
|
Interest expense, net
|
|
|
27
|
|
|
|
19
|
|
|
|
24
|
|
|
|
42
|
|
|
|
36
|
|
|
|
24
|
|
|
|
12
|
|
|
|
15
|
|
Stock-based compensation
expense(1)
|
|
|
76
|
|
|
|
89
|
|
|
|
102
|
|
|
|
11
|
|
|
|
137
|
|
|
|
134
|
|
|
|
599
|
|
|
|
156
|
|
(Gain) loss on foreign currency exchange
|
|
|
190
|
|
|
|
44
|
|
|
|
79
|
|
|
|
(54
|
)
|
|
|
84
|
|
|
|
109
|
|
|
|
50
|
|
|
|
(11
|
)
|
Severance and transition costs
|
|
|
885
|
|
|
|
|
|
|
|
32
|
|
|
|
31
|
|
|
|
350
|
|
|
|
599
|
|
|
|
(31
|
)
|
|
|
350
|
|
Acquisition, transaction and integration
expenses(2)
|
|
|
(506
|
)
|
|
|
70
|
|
|
|
116
|
|
|
|
222
|
|
|
|
148
|
|
|
|
201
|
|
|
|
888
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
1,391
|
|
|
|
943
|
|
|
|
1,167
|
|
|
|
1,124
|
|
|
|
1,854
|
|
|
|
2,332
|
|
|
|
2,872
|
|
|
|
2,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
61
|
|
|
$
|
500
|
|
|
$
|
446
|
|
|
$
|
2,072
|
|
|
$
|
(609
|
)
|
|
$
|
554
|
|
|
$
|
2,304
|
|
|
$
|
2,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents non-cash compensation
expense.
|
|
|
|
(2)
|
|
Represents costs and expenses
associated with acquisitions, integration activities and
restructuring during the period, including legal, diligence and
audit expenses, severance expenses and restructuring charges.
For more information, see Recent Acquisitions.
|
Seasonality
Historically, our business has experienced a limited degree of
seasonality with fourth quarter typically being our largest in
terms of revenue due to our customers annual budget cycle
and other market driven deadlines.
70
Liquidity
and Capital Resources
Since our inception, we have financed our operations through the
sale of preferred stock and common stock, cash flows generated
by operations and borrowings under debt instruments. Most
recently, we raised $10 million through the sale of
Series B preferred stock in the second quarter of 2008. In
November 2010, we renewed our loan agreement under which the
total limit on the lines of credit and short term capital loans
were increased from $10.0 million to $20.0 million.
This agreement requires us to comply with certain financial
covenants, including minimum levels of liquidity and EBITDA and
limits on capital expenditures. Interest on outstanding
borrowings under this line of credit is based on a floating rate
that was 4.5% on December 31, 2010 and includes a fee of
0.25% on unused portions of the revolving line. The line of
credit is scheduled to mature on November 30, 2011. We had
no outstanding borrowings and $2.0 million of outstanding
letters of credit under this agreement as of December 31,
2010. We are prohibited from paying cash dividends on or making
any other distributions with respect to our capital stock under
the terms of our loan agreement. See Description of
Certain Indebtedness for additional information regarding
the terms of this loan agreement.
As of March 31, 2011, we had cash and cash equivalents
totaling $18.5 million, net accounts receivable of
$25.5 million and negative $0.1 million of working
capital.
Capital expenditures for 2010 were $4.3 million, comprised
primarily of additional leasehold improvements, furniture and
fixtures and computer equipment. We believe that our cash and
cash equivalents following the completion of this offering
together with our cash flow from operations will be sufficient
to fund our operations and to meet our expected capital
expenditure needs of $4.5 to $6.5 million during the next
12 months. During 2011, we have invested, or plan to
invest, in expanding our office space and upgrading our existing
facilities to support our continued growth, including expanding
and renovating our facilities in Chicago, Illinois; Austin,
Texas; Pittsburgh, Pennsylvania; Waltham, Massachusetts; and
London, England. We also expect to continue to invest in the
expansion of our
on-site
customer equipment as our business grows as well as our overall
IT infrastructure. Capital expenditures for the three months
ended March 31, 2011 were $0.9 million, comprised primarily of
additional leasehold improvements, furniture and fixtures and
computer equipment. We believe that our cash and cash
equivalents together with our cash flow from operations will be
sufficient to fund our operations and to meet our expected
capital expenditure needs of $4.5 to $6.5 million for the next
twelve months. Our future capital requirements will depend on
many factors, including our rate of revenue growth, if any, the
expansion of our sales and marketing activities, the timing and
extent of spending to support product development efforts and
expansion into new territories, the timing of introductions of
new solutions and enhancements to existing solutions and the
continuing market acceptance of our compliance management and
compliance enablement offerings.
The following table shows selected balance sheet data as of the
end of the period presented as well as our cash flows from
operating activities, investing activities and financing
activities for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for
|
|
|
|
|
|
|
the Three Months
|
|
|
|
As of and for the Year Ended December 31,
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
6,594
|
|
|
$
|
23,916
|
|
|
$
|
14,558
|
|
|
$
|
14,373
|
|
|
$
|
18,492
|
|
Accounts receivable, net
|
|
|
14,777
|
|
|
|
16,621
|
|
|
|
32,099
|
|
|
|
21,037
|
|
|
|
25,480
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
671
|
|
|
|
20,943
|
|
|
|
(10,212
|
)
|
|
|
(5,495
|
)
|
|
|
4,646
|
|
Investing activities
|
|
|
(2,226
|
)
|
|
|
(2,292
|
)
|
|
|
8,581
|
|
|
|
2,410
|
|
|
|
(882
|
)
|
Financing activities
|
|
|
6,668
|
|
|
|
(1,165
|
)
|
|
|
(7,495
|
)
|
|
|
(6,375
|
)
|
|
|
190
|
|
Effect of changes in exchange rates on cash flows
|
|
|
40
|
|
|
|
(164
|
)
|
|
|
(232
|
)
|
|
|
(83
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
5,153
|
|
|
$
|
17,322
|
|
|
$
|
(9,358
|
)
|
|
$
|
(9,543
|
)
|
|
$
|
3,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Cash
and Cash Equivalents
Our cash and cash equivalents at March 31, 2011 were held
for working capital purposes and were invested primarily in
money market accounts. We do not enter into investments for
trading or speculative purposes.
Accounts
Receivable, net
We extend trade credit to customers in the ordinary course of
business. Our standard accounts receivables terms and conditions
did not materially change during 2008, 2009, 2010 and the three
months ended March 31, 2011. Our accounts receivable
balance fluctuates from
period-to-period
which affects our cash flow from operating activities. The
fluctuations vary depending on the timing of our billing
activity, cash collections and changes to our allowance for
doubtful accounts. We occasionally have customers who make large
purchases at the end of a quarter which leads to a higher
period-end accounts receivable balance. Such customers typically
pay the invoice in the following quarter. Our allowance for
doubtful accounts represents our best estimate of the amount of
probable credit losses.
Cash
Flows
Cash
Provided by (Used in) Operating Activities
Net cash used by operating activities was $5.5 million and net
cash provided by operating activities was $4.6 million for
the three months ended March 31, 2010 and 2011.
The cash used by our operating activities in the three months
ended March 31, 2010 was a result of our net loss of $2.5
million, adjusted for increases in accounts receivable of $2.2
million, bad debt of $0.6 million and prepaid expenses of $0.2
million, and decreases in accounts payable of $0.7 million,
accrued expenses of $0.7 million and deferred revenue of $1.1
million. The increases in accounts receivable was due to our
increase in revenue, the decreases in accounts payable and
accrued expenses was due to the timing of payables and the
increase in bad debt was due to a number of customers slowing
down payments for which we increased our reserve.
The cash provided by our operating activities in the three
months ended March 31, 2011 was a result of our net income of
$0.7 million, adjusted for an increase in prepaid expenses of
$0.8 million and decreases in accounts receivable of $6.6
million, accounts payable of $0.9 million, accrued expenses of
$0.7 million, taxes payable of $0.1 million and deferred
revenue of $2.2 million. Accounts receivable decreased as a
large receivable from the fourth quarter of 2010 was collected.
The decrease in deferred revenue was the result of a the sales
mix in the period favoring shorter term invoicing and the
decreases in accounts payable and accrued expenses came from the
timing of payables.
Net cash provided by operating activities was $0.7 million
and $20.9 million for the years ending December 31,
2008 and 2009, and net cash used in operating activities was
$10.2 million in the year ending December 31, 2010.
The cash provided by our operating activities in 2008 was a
result of our net loss of $2.0 million, adjusted for an
increase in deferred revenue of $4.2 million and an
increase in accrued expenses of $2.1 million, offset by a
net increase in accounts receivable of $4.4 million, an
increase in prepaid expenses of $0.6 million and a decrease
in accounts payable of $0.8 million. Deferred revenue
increased primarily due to an increase in compliance management
subscribers at favorable billing terms. The increase in accounts
receivable was due to our 28% increase in revenue and the
increase in accrued wages and other accrued expenses was due to
the increase in the number of customers and employees throughout
the year.
The cash provided by our operating activities in 2009 was a
result of our net loss of $1.5 million, adjusted for an
increase in deferred revenue of $22.2 million, an increase
in other long-term liabilities of $1.9 million and a
$0.2 million decrease in prepaid expenses. This was offset
by a decrease in accrued expenses of $3.9 million, a
decrease in accounts payable of $0.6 million and a net
increase in accounts receivable of $0.1 million. Deferred
revenue increased primarily as a result of favorable billing
terms for a large partner relationship for a compliance
management program. The increase in accounts receivable was due
to our 25% increase in revenue and the increase in other accrued
expenses was due to the increase in the number of customers and
employees throughout the year.
The cash used by our operating activities in 2010 was primarily
a result of our net loss of $4.6 million, adjusted for an
increase in accrued expenses of $2.4 million, as well as a
$0.4 million expense associated with inventory
72
impairment and the disposal of equipment. This was offset by a
net increase in accounts receivable of $11.5 million, an
increase in prepaid expenses of $1.2 million, a decrease in
accounts payable of $1.3 million and a decrease in deferred
revenue of $1.0 million. The increase in accounts
receivable came from organic growth and the customers we added
from our acquisitions of Breach Security, Intellitactics and
BitArmor. In particular, $6.0 million of the increase in
accounts receivable as of December 31, 2010 compared to
December 31, 2009 was attributable to a single contract
invoiced in the fourth quarter of 2010. This increase was a
reflection of a particular contract rather than a change in
credit policy or invoicing approach. This receivable was
subsequently paid in the first quarter of 2011.
Cash
Provided by (Used in) Investing Activities
Net cash provided by investing activities was $2.4 million and
the net cash used in investing activities was $0.9 million
for the three months ended March 31, 2010 and 2011,
respectively. Capital expenditures were $0.3 million and
$0.9 million for the three months ended March 31, 2010 and 2011,
respectively. In the three months ended March 31, 2010 there was
net inflow of cash gained from the acquisitions of BitArmor and
Intellitactics.
Net cash used in investing activities was $2.2 million and
$2.3 million for the years ending December 31, 2008
and 2009, respectively, and the cash provided from investing
activities was $8.6 million for the year ending
December 31, 2010. Capital expenditures were
$1.8 million, $2.7 million and $4.3 million for
the years ending December 31, 2008, 2009 and 2010,
respectively. In 2008, there was a net outflow of
$0.4 million spent on our acquisitions while in 2009 the
cash gained from our two acquisitions was $0.5 million. In
2010, there was a net inflow of $12.9 million in cash
associated with the acquisitions of Breach Security,
Intellitactics and BitArmor.
Cash
Provided by (Used in) Financing Activities
Net cash used in financing activities was $6.4 million and net
cash provided by financing activities was $0.2 million in
the three months ended March 31, 2010 and 2011, respectively.
Net cash used in financing activities in the three months ended
March 31, 2010 was due to the repayment of $6.3 million of loans
from the acquisitions of BitArmor and Intellitactics and $0.1
million of payments of capital lease obligations. The net cash
provided by financing activities in the three months ended March
31, 2011 was due to the receipt of $0.6 million of proceeds from
the exercise of options that was partially offset by $0.3
million prepayment of initial public offering costs and
$0.1 million of payments on capital lease obligations.
We have not generally utilized borrowings to finance our
operations as cash from operations and two sales of our equity
securities have provided us with sufficient liquidity to meet
our growth needs. Net cash provided by financing activities for
the year ending December 31, 2008 was $6.7 million and
the cash used in financing activities was $1.2 million and
$7.5 million for the years ended December 31, 2009 and
2010, respectively. Net cash provided by financing activities in
2008 was due to a $10.0 million financing in which we
issued Series B preferred stock, plus $0.2 million of
cash generated from stock option exercises, which was partially
offset by the $2.5 million payment of an outstanding line
of credit with our bank, and a $1.0 million payment of a
stockholder note associated with a previous acquisition. The
cash used in 2009 was primarily due to the payment of
$1.1 million on a stockholder note associated with a
previous acquisition, $0.2 million of capital lease
payments and a partial offset of $0.1 million received from
stock option exercises. The cash used in 2010 was the final
$1.0 million payment on a stockholder note associated with
a previous acquisition, combined with our repayment of a total
of $6.3 million on notes acquired in connection with our
acquisitions of Breach Security, Intellitactics and BitArmor.
Additionally, there was $0.3 million of capital lease
payments, which was partially offset by receiving
$0.1 million from stock option exercises.
Quantitative
and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity. We had cash and
cash equivalents of $6.6 million, $23.9 million, and
$14.6 million at December 31, 2008, 2009 and 2010,
respectively. We held these amounts primarily in money market
funds. We hold cash and cash equivalents for working capital
purposes so we do not have material exposure to market risk with
respect to investments. We do not use derivative financial
instruments for speculative or trading purposes; however, we may
adopt specific hedging strategies in the future. Any declines in
interest rates, however, will effect payments for outstanding
debt. As of December 31, 2010, we did not have any
outstanding borrowings. We do, however, have a loan agreement in
place that provides us with available borrowings of up to
$20.0 million. Although we do not
73
currently anticipate accessing this loan agreement other than
for $2.0 million of letters of credit outstanding under
this agreement, we may choose to do so in the future. Changes in
interest rates will have an impact on any future borrowings we
may incur as well as the interest we may earn on our cash and
cash equivalents, including the cash we will receive from the
net proceeds of this offering. See Use of Proceeds.
Foreign Currency Risk. We market our products
in North America, EMEA, APAC and LAC and develop our products in
the United States, Canada and Israel. As a result of our
business activities in foreign countries, our financial results
could be affected by factors such as changes in foreign currency
exchange rates or economic conditions in foreign markets, and
there is no assurance that exchange rate fluctuations will not
harm our business in the future. We sell our products in certain
countries in the local currency for the respective country. This
provides some natural hedging because most of our
subsidiaries operating expenses are denominated in their
local currencies. Regardless of this natural hedging, our
results of operations may be adversely impacted by the exchange
rate fluctuation. Although we will continue to monitor our
exposure to currency fluctuations and, where appropriate, may
use financial hedging techniques in the future to minimize the
effect of these fluctuations, we are not currently engaged in
any financial hedging transactions.
Contractual
Obligations and Commitments
We generally do not enter into long-term minimum purchase
commitments. Our principal commitments, in addition to those
related to the line of credit discussed above, consist of
obligations under facility leases for office space.
The following table summarizes our outstanding contractual
obligations as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than 1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than 5 Years
|
|
|
|
(in thousands)
|
|
|
Operating leases
|
|
$
|
10,121
|
|
|
$
|
2,499
|
|
|
$
|
2,607
|
|
|
$
|
1,811
|
|
|
$
|
3,204
|
|
Capital leases
|
|
|
832
|
|
|
|
498
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,953
|
|
|
$
|
2,997
|
|
|
$
|
2,941
|
|
|
$
|
1,811
|
|
|
$
|
3,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Arrangements
During the years ended December 31, 2008, 2009 and 2010, we
did not have any relationships with unconsolidated organizations
or financial partnerships, such as structured finance or special
purpose entities, that would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Effects
of Inflation
Our results of operations and financial condition are presented
based on historical costs. While it is difficult to accurately
measure the impact of inflation due to the imprecise nature of
the estimates required, we believe that the effects of
inflation, if any, on our results of operations and financial
condition have been immaterial.
Critical
Accounting Policies and Estimates
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States, which requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. We base our
estimates and judgments on our historical experience, knowledge
of current conditions and our beliefs regarding likely
occurrences in the future, given available information. Actual
results may differ from those estimates, and any differences may
be material to our financial statements. Further, if we apply
different factors, or change the method by which we apply the
various factors that are used, in making our critical estimates
and judgments, our reported operating results and financial
condition could be materially affected.
74
We consider the following accounting policies to be both those
most important to the portrayal of our results of operations and
financial condition and those that require the most subjective
judgment:
|
|
|
|
|
revenue recognition;
|
|
|
|
accounts receivable and allowance for doubtful accounts;
|
|
|
|
goodwill, intangible assets and business combinations;
|
|
|
|
income taxes; and
|
|
|
|
stock-based compensation.
|
Revenue
Recognition
We generate revenue from subscription services, professional
services and product sales. We recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collection is
probable. Product is considered delivered to the customer once
it has been shipped and title and risk of loss have been
transferred. Revenues related to subscription contracts are
recognized ratably over service, maintenance or subscription
period. Revenues from professional services are recognized at
the time service is performed. Revenues from sales of perpetual
software licenses and related hardware are recognized upon
delivery, assuming all other conditions for revenue recognition
noted above have been met.
For multiple deliverable arrangements we allocate revenue to all
deliverables based on their relative selling prices. In such
circumstances, we use a hierarchy to determine the selling price
to be used for allocating revenue to deliverables:
(i) vendor-specific objective evidence of fair value, or
VSOE, (ii) third-party evidence of selling
price, or TPE, and (iii) best estimate of the
selling price, or BESP. VSOE generally exists only
when we sell the deliverable separately and is the price
actually charged by us for that deliverable. BESPs reflect our
best estimates of what the selling prices of elements would be
if they were sold regularly on a stand-alone basis.
Our process for determining our BESP for deliverables without
VSOE or TPE involves managements judgment. Our process
considers multiple factors that may vary depending upon the
unique facts and circumstances related to each deliverable. Key
factors primarily considered in developing BESP include prices
charged by us for similar offerings when sold separately,
pricing policies and approvals for discounts from standard
pricing and other business objectives. We may also consider
additional factors as appropriate, including the pricing of
competitive alternatives and product-specific business
objectives. If the facts and circumstances underlying the
factors considered change, or if we consider additional factors,
our BESP may change.
From time to time, we sell on-demand software or compliance
solutions with professional services. In such cases, we allocate
arrangement consideration based on our estimated selling price
of the on-demand software or compliance solution and VSOE of the
selling price of the professional services. Hardware with
embedded software is treated as a single unit of accounting when
they operate together to deliver the essential functionality of
the hardware.
Accounts
Receivable and Allowance for Doubtful Accounts
We extend trade credit to a substantial portion of our customers
in the normal course of business. The standard credit terms are
net 30 days. Unbilled receivables represent revenue
primarily from time and materials arrangements for labor hours
provided but not yet billed.
We record an allowance for doubtful accounts for estimated
probable losses on uncollectible accounts receivable. A portion
of our customers make recurring payments using credit cards,
which reduces our exposure for uncollectible accounts
receivable. For the customers that are billed for services
rendered, management considers the following factors in
assessing collectability: (i) our historical write-offs,
(ii) the aging of the accounts receivable including trends
within the ratios involving the age of the accounts receivable,
(iii) change in the credit-worthiness of customers, and
(iv) general economic conditions. In cases where we are
aware of circumstances that may impair a specific customers
ability to meet their obligations to us, we record a specific
allowance against amounts due from customers. Management has
reduced the recognized receivables to the amounts it reasonably
believes will ultimately be collected.
75
Goodwill,
Intangible Assets and Business Combinations
When we acquire businesses, we allocate the purchase price to
tangible assets and liabilities and identifiable intangible
assets acquired. Any residual purchase price is recorded as
goodwill. The allocation of the purchase price requires
management to make significant estimates in determining the fair
values of assets acquired and liabilities assumed, especially
with respect to intangible assets. These estimates are based on
information obtained from management of the acquired companies
and historical experience. These estimates can include, but are
not limited to, the cash flows that an asset is expected to
generate in the future, and the cost savings expected to be
derived from acquiring an asset. These estimates are inherently
uncertain and unpredictable, and if different estimates were
used the purchase price for the acquisition could be allocated
to the acquired assets and liabilities differently from the
allocation that we have made. In addition, unanticipated events
and circumstances may occur which may affect the accuracy or
validity of such estimates, and if such events occur we may be
required to record a charge against the value ascribed to an
acquired asset or an increase in the amounts recorded for
assumed liabilities.
Goodwill
We review goodwill for impairment on an annual basis in the
fourth quarter of each year, and on an interim basis whenever
events or changes in circumstances indicate that the carrying
value may not be recoverable, at the reporting unit level. Our
reporting units are consistent with our operating segments.
Before performing the goodwill impairment test, we first assess
the value of long-lived assets in each reporting unit, including
tangible and intangible assets. We then perform a two-step
impairment test on goodwill. In the first step, we compare the
estimated fair value of equity of each reporting unit to its
allocated carrying value (book value) of equity. If the carrying
value of the reporting unit exceeds the fair value of the equity
associated with that unit, there is an indicator of impairment
and we must perform the second step of the impairment test. This
second step involves determining the implied fair value of that
reporting units goodwill in a manner similar to the
purchase price allocation for an acquired business, using the
reporting units calculated fair value as an assumed
purchase price. If the carrying value of the reporting
units goodwill exceeds its implied fair value, then we
would record an impairment loss equal to the excess.
The process of estimating the fair value and carrying value of
our reporting units equity requires significant judgment
at many points during the analysis. Many assets and liabilities,
such as accounts receivable and property and equipment, are not
specifically allocated to an individual reporting unit, and
therefore, we apply judgment to allocate the assets and
liabilities, and this allocation affects the carrying value of
the respective reporting units. Similarly, we use judgment to
allocate goodwill to the reporting units based on relative fair
values. The use of relative fair values has been necessary for
certain reporting units due to changes in our operating
structure in prior years. To determine a reporting units
fair value, we use the income approach under which we calculate
the fair value of each reporting unit based on the estimated
discounted future cash flows of that unit. Applying the income
approach requires that we make a number of important estimates
and assumptions and we evaluate the reasonableness of this
approach with the market approach, which involves a review of
the carrying value of our assets relative to our market
capitalization and to the valuation of publicly traded companies
operating in the same or similar lines of business.
We estimate the future cash flows of each reporting unit based
on historical and forecasted revenue and operating costs. This,
in turn, involves further estimates, such as estimates of future
revenue and expense growth rates and foreign exchange rates. In
addition, we apply a discount rate to the estimated future cash
flows for the purpose of the valuation. This discount rate is
based on the estimated weighted-average cost of capital for each
reporting unit and may change from year to year. For example, in
our valuation process in the fourth quarter of 2010 we used a
lower discount rate than in the prior year due to stabilized
risk associated with the global economic conditions. Changes in
these key estimates and assumptions, or in other assumptions
used in this process, could materially affect our impairment
analysis for a given year.
As of December 31, 2010, our goodwill balance was
$42.1 million. Based on the impairment analysis performed
in the fourth quarter, we determined that the fair value of each
of our reporting units substantially exceeded the carrying value
of the unit. While discount rates are only one of several
important estimates used in the analysis, we determined that an
increase of one percentage point in the discount rate used for
each respective reporting unit would not have resulted in an
impairment indicator for any unit at the time of this analysis.
76
A number of factors, many of which we have no ability to
control, could affect our financial condition, operating results
and business prospects and could cause actual results to differ
from the estimates and assumptions we employed. These are
detailed in the section entitled Risk Factors,
included elsewhere in this prospectus.
Intangible
Assets
We assess the impairment of intangible assets whenever events or
changes in circumstances indicate that an asset groups
carrying amount may not be recoverable due to changes in
business conditions such as lower than expected sales or
significant changes in the economy. An impairment loss would be
recognized when the sum of the undiscounted estimated future
cash flows expected to result from the use of the asset group
and its eventual disposition is less than its carrying amount.
Such impairment loss would be measured as the difference between
the carrying amount of the asset group and its fair value. Our
cash flow assumptions are based on historical and forecasted
revenue, operating costs, and other relevant factors. If
managements estimates of future operating results change,
or if there are changes to other assumptions, the estimate of
the fair value of our intangible assets could change
significantly. Such change could result in impairment charges in
future periods, which could have a significant impact on our
operating results and financial condition.
Income
Taxes
We use the asset and liability method of accounting for income
taxes. Under this method, we record deferred income taxes based
on temporary differences between the financial reporting and tax
bases of assets and liabilities and use enacted tax rates and
laws that we expect will be in effect when we recover those
assets or settle those liabilities, as the case may be, to
measure those taxes. In cases where the expiration date of tax
carryforwards or the projected operating results indicate that
realization is not likely, we provide for a valuation allowance.
We have deferred tax assets, resulting from deductible temporary
differences that may reduce taxable income in future periods. A
valuation allowance is required when it is more likely than not
that all or a portion of a deferred tax asset will not be
realized. In assessing the need for a valuation allowance, we
estimate future taxable income, considering the feasibility of
ongoing tax-planning strategies and the realizability of tax
loss carryforwards. Valuation allowances related to deferred tax
assets can be impacted by changes in tax laws, changes in
statutory tax rates and future taxable income levels. If we were
to determine that we would not be able to realize all or a
portion of our deferred tax assets in the future, we would
reduce such amounts through a charge to income in the period in
which that determination is made. Conversely, if we were to
determine that we would be able to realize our deferred tax
assets in the future in excess of the net carrying amounts, we
would decrease the recorded valuation allowance through an
increase to income in the period in which that determination is
made. Based on the assessment, we recorded a valuation allowance
of $24.4 million at December 31, 2010 and
$6.5 million at December 31, 2009. We provided a
valuation allowance in 2010 and 2009 related to certain federal
and state income tax attributes we did not believe we could
utilize within the tax carryforward periods.
In the ordinary course of business there is inherent uncertainty
in quantifying our income tax positions. We assess our income
tax positions and record tax benefits for all years subject to
examination based upon managements evaluation of the
facts, circumstances and information available at the reporting
date. For those tax positions where it is more likely than not
that a tax benefit will be sustained, we have recorded the
highest amount of tax benefit with a greater than 50% likelihood
of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information.
For those income tax positions where it is not more likely than
not that a tax benefit will be sustained, no tax benefit has
been recognized in the financial statements. See note 8 to
the notes to our consolidated financial statements for further
discussion.
Stock-Based
Compensation
Common
Stock
We recognize stock-based compensation expense for stock-based
compensation awards granted to our employees, consultants and
other service providers that can be settled in shares of our
common stock. Compensation expense for all stock-based
compensation awards granted is based on the grant date fair
value estimate for each award as determined by our board of
directors or the compensation committee of our board of
directors. We
77
recognize these compensation costs on a straight-line basis over
the requisite service period of the award, which is generally
four years. As stock-based compensation expense recognized is
based on awards ultimately expected to vest, such expense is
reduced for estimated forfeitures. Stock-based compensation
expense related to employee stock options that can be settled in
our common stock during the years ended December 31, 2008,
2009 and 2010, was $0.3 million, $0.3 million and
$1.0 million, respectively.
As of December 31, 2010, there was $1.2 million of
unrecognized stock-based compensation expense related to
non-vested stock option awards that we expect to be recognized
over a weighted average vesting period of 1.4 years.
As of each stock option grant date, we considered the fair value
of the underlying common stock, determined as described below.
Management determined the estimated per share fair value of the
common stock at such dates using contemporaneous valuations
consistent with the American Institute of Certified Public
Accountants Practice Aid, Valuation of Privately-Held
Company Equity Securities Issued as Compensation, or the
AICPA Practice Aid. With respect to each such
valuation, management obtained a contemporaneous valuation.
The table below sets forth information with respect to options
granted by us since January 1, 2010.
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
Exercise
|
Date of Grant
|
|
Number of Shares
|
|
Price(1)
|
|
January 6, 2010
|
|
|
1,000,000
|
|
|
$
|
1.15
|
|
June 3, 2010
|
|
|
461,500
|
|
|
|
1.08
|
|
September 22, 2010
|
|
|
342,000
|
|
|
|
2.05
|
|
December 16, 2010
|
|
|
46,000
|
|
|
|
2.89
|
|
January 25, 2011
|
|
|
1,138,000
|
|
|
|
2.89
|
|
March 4, 2011
|
|
|
2,636,000
|
|
|
|
2.89
|
|
April 4,
2011(2)
|
|
|
12,500
|
|
|
|
2.05
|
|
April 4, 2011
|
|
|
29,000
|
|
|
|
2.89
|
|
April 18, 2011
|
|
|
113,000
|
|
|
|
2.89
|
|
|
|
|
(1)
|
|
As of the date of grant, the
exercise price of the options was equal to the fair value of the
underlying shares of Class A common stock as determined by
our management.
|
|
|
|
(2)
|
|
In connection with our acquisition
of Breach Security, we agreed to grant stock options with an
exercise price equal to the fair market value of our common
stock on the closing date of the acquisition to certain
employees of Breach Security. Because one of these employees did
not receive the stock options at the same time as the other
employees received their stock options, on April 4, 2011,
our board of directors awarded this individual the 12,500 stock
options as contemplated by the agreement and plan of merger and
reorganization, with the same strike price of $2.05 that would
have been used had his options been awarded at the same time as
the other employees stock options.
|
Determination
of the Fair Value of Common Stock
Valuations
Between July 2008 to March 2010
For valuations conducted prior to June 2010, a multi-step
process of valuation was employed. First, our management
established our enterprise value using generally accepted
valuation methodologies, including the income approach in the
form of the discounted cash flow, or DCF, method and
the market approach in the form of the guideline public company
method and the guideline transactions method. Next, available
cash and proceeds from redemptions of
in-the-money
options were added to the enterprise value, and total
outstanding debt was deducted, to determine our total equity
value. Then, management allocated the total equity value among
the securities that comprise our capital structure using the
Option-Pricing Method, as described in the AICPA Practice Aid.
Each of the steps and the methods within each step are discussed
in greater detail below.
For the DCF method, our management prepared detailed annual
projections of future cash flows over a period of ten years (the
discrete projection period), and applied a terminal
value assumption to the final year within the discrete
projection period to estimate the total value of the cash flows
beyond the final year. Projections of future cash flows were
based on the estimated net debt-free cash flows. These cash
flows were then discounted to their present value as of the
valuation date at an estimated cost of capital. The estimated
cost of capital was derived by a
78
weighted average cost of capital, or WACC, using the
capital asset pricing model, or CAPM, based in part
on guideline publicly-traded companies. The terminal value was
estimated using the Gordon Growth model, which is based on the
expected cash flows of the last year in the discrete projection
period, the expected long-term growth rate, and the WACC.
For the guideline public company method, our management selected
a group of publicly-traded companies that were deemed comparable
to us, or the Guideline Public Companies. The
Guideline Public Companies selected were primarily businesses
with significant presence in the information security and
transaction processing compliance industry. The valuation
multiples considered for providing indicated values were
trailing 12 months, or TTM, sales as well as
estimated future sales, EBITDA, and earnings before interest and
taxes, or EBIT.
For the guideline transactions method, closed transactions
representing a change of control (majority interest acquired)
occurring within five years prior to the valuation date were
selected where the target had significant presence in the
information security and transaction processing compliance
industry. A range of implied revenue multiples reflecting the
ratio of the purchase price paid in the transactions to the
target companies TTM revenue prior to the acquisition date
was determined. Our actual TTM revenue was then applied to these
multiples to provide an indicated range of value.
The valuation ranges resulting from calculations using the
aforementioned methodologies were then averaged to determine an
estimated overall enterprise value, to which cash and the
proceeds from redemptions of
in-the-money
options were added, and total outstanding debt was deducted to
determine the aggregate equity value available to our preferred
and common equity holders. The aggregate equity value was
allocated to the equity holders using the Option-Pricing Method.
The Option-Pricing Method treats common stock and preferred
stock as call options on our total equity value, with exercise
prices based on the value thresholds at which the allocation
among the various holders of our securities changes. To apply
the Option-Pricing Method, the rights and preferences of the
various securities that make up our capital structure were first
established. Then, the various strike prices, or points at which
the sharing percentages changed among our securities, were
calculated. The strike prices were determined based on the
liquidation preferences of our various preferred series shares
as well as the various thresholds where stock options would be
motivated to exercise their rights. The volatility of our equity
was determined by examining the prevailing standard deviation of
the Guideline Public Companies. Finally, the term of the options
was determined by our management based on an estimate of when an
expected liquidity event would take place.
79
The following table provides a summary of the key assumptions,
indicated results, and valuation conclusions as well as a
discussion of the factors that influenced changes to the
valuation assumptions and conclusions as of the various
valuation dates after July 21, 2008. Specific amounts set
forth in the table reflect the mid-point of ranges considered
and the ranges included in the table reflect the low and high
points of the range.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Dates
|
|
|
July 21,
|
|
February 27,
|
|
August 27,
|
|
January 7,
|
|
March 2,
|
|
June 21,
|
|
December 5,
|
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
|
(dollars in millions, except per share data)
|
|
Discounted Cash Flow Analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term growth rate
|
|
4.0%
|
|
4.0%
|
|
4.0%
|
|
4.0%
|
|
4.0%
|
|
n/a
|
|
n/a
|
Discount rate
|
|
17.5%
|
|
18.0%
|
|
17.0%
|
|
17.0%
|
|
17.0%
|
|
n/a
|
|
n/a
|
Indicated value
|
|
$98 - $120
|
|
$89 - $120
|
|
$104 - $130
|
|
$120 - $154
|
|
$122 -$157
|
|
n/a
|
|
n/a
|
Guideline Public Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TTM sales multiples
|
|
1.90x
|
|
1.75x
|
|
1.50x
|
|
1.70x
|
|
1.70x
|
|
n/a
|
|
n/a
|
Projected sales
|
|
1.50x
|
|
1.40x
|
|
1.25x
|
|
1.30x
|
|
1.30x
|
|
n/a
|
|
n/a
|
Projected EBITDA
|
|
11.0x
|
|
8.5x
|
|
9.0x
|
|
9.8x
|
|
9.5x
|
|
n/a
|
|
n/a
|
Projected EBIT
|
|
n/a
|
|
9.5x
|
|
9.5x
|
|
11.5x
|
|
11.5x
|
|
n/a
|
|
n/a
|
Indicated value
|
|
$95 - 115
|
|
$86 - 104
|
|
$99 - 119
|
|
$121 - 160
|
|
$121 - 167
|
|
n/a
|
|
n/a
|
Guideline Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TTM sales multiples
|
|
2.0x - 2.25x
|
|
1.5x - 2.0x
|
|
1.4x - 1.8x
|
|
1.6x - 2.0x
|
|
1.6x -2.0x
|
|
n/a
|
|
n/a
|
Indicated value
|
|
$104 - $117
|
|
$88 - $117
|
|
$93 - $120
|
|
$118 - $148
|
|
$122 -$152
|
|
n/a
|
|
n/a
|
Valuation Conclusions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise value
|
|
$99 - $117
|
|
$87 - $109
|
|
$99 - $123
|
|
$120 - $154
|
|
$122 -$159
|
|
n/a
|
|
n/a
|
Aggregate equity value
|
|
$99 - $117
|
|
$93 - $115
|
|
$107 - $132
|
|
$151 - $185
|
|
$148 -$185
|
|
n/a
|
|
n/a
|
Equity Allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Pricing Method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
45%
|
|
45%
|
|
35%
|
|
32%
|
|
24%
|
|
n/a
|
|
n/a
|
Term
|
|
3.0
|
|
3.0
|
|
1.00
|
|
1.00
|
|
1.00
|
|
n/a
|
|
n/a
|
Risk-free rate
|
|
2.82%
|
|
1.40%
|
|
0.46%
|
|
0.36%
|
|
0.30%
|
|
n/a
|
|
n/a
|
Concluded value per Class A common share
|
|
$0.78
|
|
$0.72
|
|
$0.79
|
|
$1.15
|
|
$1.08
|
|
n/a
|
|
n/a
|
Concluded value per Class B common share
|
|
$0.73
|
|
$0.69
|
|
$0.78
|
|
$1.15
|
|
$1.08
|
|
n/a
|
|
n/a
|
PWERM Method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale/merger-sales multiples
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
2.5x - 3.5x
|
|
2.5x - 4.5x
|
Sale/merger-per share value
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
$1.91
|
|
$2.77
|
IPO-sales multiples
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
2.5x - 3.5x
|
|
2.5x - 4.5x
|
IPO-per share value
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
$2.19
|
|
$2.93
|
Concluded value per Class A common share
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
$2.05
|
|
$2.89
|
Concluded value per Class B common share
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
$2.05
|
|
$2.89
|
80
Set forth below for each valuation date after July 21, 2008
is a brief overview of the factors considered by management in
determining the estimated value of our common stock.
February 27,
2009 Valuation
The primary factors that supported this estimate, and which
contributed to a decrease in the estimated value of the common
stock between July 21, 2008 and February 27, 2009 were:
|
|
|
|
|
lower than expected operating results, including revenue and
profitability metrics, for the year ended December 31, 2008;
|
|
|
|
expectations for increased capital expenditures needs;
|
|
|
|
increased market risk and uncertainty associated with broader
economic trends occurring between July 2008 and February 2009,
including: (i) the contraction of the worldwide credit
markets in the fall of 2008; (ii) substantially decreased
acquisition activity; and (iii) lack of support for initial
public offerings in the equity markets;
|
|
|
|
substantial declines in the equity valuations of the Guideline
Public Companies; and
|
|
|
|
widespread, significant reluctance of institutional and other
investors to invest capital in private companies on acceptable
terms, if at all.
|
August 27,
2009 Valuation
The primary factors that supported this estimate, and which
contributed to an increase in the estimated value of the common
stock between February 27, 2009 and August 27, 2009
were:
|
|
|
|
|
improving capital markets;
|
|
|
|
increased focus and demonstrated traction in the market for
smaller businesses, which was expected to drive increases in
growth and profitability;
|
|
|
|
acquisition of Vericept, which was expected to increase sales
through expanded data loss prevention technology offerings;
|
|
|
|
expectations for projected declining levels of net working
capital (increasing levels of negative net working capital),
which were expected to increase free cash flows;
|
|
|
|
decreased market risk and uncertainty associated with improving
economic trends; and
|
|
|
|
increases in the equity valuations of the Guideline Public
Companies.
|
January 7,
2010 Valuation
The primary factors that supported this estimate, and which
contributed to an increase in the estimated value of the common
stock between August 27, 2009 and January 7, 2010 were:
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higher than expected operating results for the year ended
December 31, 2009 primarily driven by stronger than
anticipated profitability;
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improving capital markets;
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continued strong demand from smaller businesses to meet
compliance requirements;
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increased profitability expectations;
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acquisition of BitArmor, which was expected to increase sales
through add-on products related to encryption technology;
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projected further declining levels of net working capital
(increasing levels of negative net working capital), which were
expected to increase free cash flows;
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increased retention of cash;
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decreased market risk and uncertainty associated with continuing
improvement of economic trends;
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increased merger and acquisition activity including the
acquisitions of two of the previously identified guideline
public companies; and
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increases in the equity valuations of the Guideline Public
Companies.
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March 2,
2010 Valuation
The primary factors that supported this estimate, and which
contributed to a slight decrease in the estimated value of the
common stock between January 7, 2010 and March 2, 2010
were:
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slightly lower than expected operating results for the TTM ended
February 28, 2010;
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decrease in available cash; and
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dilutive impact of the issuance of Class A common stock or
stock options on Class A common stock as part of recent
acquisitions that were either exercised or were
in-the-money
and thus considered part of the common shares outstanding.
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Valuations
Between June 2010 and December 2010
Starting in mid-2010, management began using the
Probability-Weighted Expected Return Method, or
PWERM, as outlined in the AICPA Practice Aid, for
the contemporaneous valuations of the common stock due to:
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our improved financial results as demonstrated by strong sales
growth and improving profitability;
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our favorable growth prospects and expectations for continued
improvement in profitability; and
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the software acquisition market was picking up.
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The PWERM estimates the value of the common stock-based upon an
analysis of future values of the enterprise assuming various
outcomes. Share value is based upon the probability-weighted
present value of expected future investment returns, considering
each of the possible future outcomes available to the
enterprise, as well as the rights of each share class.
June 21,
2010 Valuation
In the second quarter, our management was in preliminary stages
of assessing the prospects of an initial public offering while
paying attention to the software acquisition/merger markets. We
had strong prospects for a near-term liquidity event and we
expected that such a liquidity event would take place in the
following 3 to 18 months. Accordingly, a 50% weight was
assigned for the sale/merger scenario and a 50% weight was
assigned to the IPO scenario.
Sale/Merger Scenarios Based on three
possible exit dates: September 2010, December 2010, and December
2011. For each of the sale/merger scenarios, based on prevailing
market multiples, we assumed that, on an enterprise basis, we
would be valued in the range of 2.5x to 3.5x estimated TTM sales
as of the exit date.
IPO Scenarios Based on two possible
exit dates: December 2010 and December 2011. Under the IPO
scenarios, based on their respective terms, all preferred shares
would automatically convert to common stock. For each of the IPO
scenarios, based on prevailing market multiples, we assumed
that, on an enterprise basis, we would be valued in the range of
2.5x to 3.5x estimated TTM sales as of the exit date.
The primary factors that contributed to the increase in the
estimated fair value of the common stock from the March 2,
2010 valuation were:
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improved guideline public company valuations;
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improving capital markets; and
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increased merger and acquisition activity in our industry
resulting in higher multiples and greater prospects for
liquidity.
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December 5,
2010 Valuation
During the latter half of 2010, our management undertook a
process to evaluate underwriters for a potential IPO.
Accordingly, our management continued its use of the PWERM to
estimate the value of the common stock as of December 5,
2010. Based on the continued strong prospects of a near-term
liquidity event, with a strong likelihood of an IPO event, a 75%
weight was assigned to the IPO scenarios and a 25% weight was
assigned to the sale/merger scenarios.
IPO Scenarios Based on three possible
exit dates: June 2011, December 2011, and December 2012. For
each of the IPO scenarios, based on prevailing market multiples,
we assumed that, on an enterprise basis,we would be valued in
the range of 2.5x to 4.5x estimated TTM sales as of the exit
date.
Sale/Merger Scenarios Based on three
possible exit dates: June 2011, December 2011, and December
2012. For each of the sale/merger scenarios, based on prevailing
market multiples, we assumed that, on an enterprise basis, we
would be valued in the range of 2.5x to 4.5x estimated TTM sales
as of the exit date.
The primary factors that contributed to the increase in the
estimated fair value of the common stock from the June 21,
2010 valuation were:
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improved guideline public company valuations;
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continued improvement in the capital markets;
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increased merger and acquisition activity in our industry
including the acquisition of previously identified guideline
public companies acquired at significantly higher multiples than
their publicly-traded multiples as of the previous
valuation; and
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efforts undertook to prepare for a possible IPO of the common
stock.
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Recent
Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board
provided clarification regarding the acquisition date that
should be used for reporting pro forma financial information
disclosures required by Topic 805 when comparative financial
statements are presented. This guidance also required entities
to provide a description of the nature and amount of material,
nonrecurring pro forma adjustments that are directly
attributable to the business combination.
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BUSINESS
Overview
Trustwave is a leading provider of on-demand data security
compliance solutions that enable businesses and other
organizations of all sizes to efficiently achieve and maintain
compliance with regulatory requirements and industry standards.
Our compliance management solutions, including our easy-to-use
software-as-a-service TrustKeeper offering, have helped hundreds
of thousands of organizations simplify the complex process of
validating compliance. Additionally, our broad suite of
compliance enablement solutions remediates data security
deficiencies, allowing our customers to achieve and maintain
compliance in a cost effective manner. These solutions assist
our subscribers in comprehensively securing their network
infrastructure, data communications and sensitive information
assets, protecting them against the increasing threats of
unauthorized access, fraudulent activity and other intrusions or
breaches. We have been successful in rapidly expanding our
customer base across a broad range of industries as a result of
our differentiated partner network, which is comprised of many
of the worlds largest financial institutions and other
organizations influential to the compliance and data security
mandates of their customers.
Our data security compliance solutions can be applied to address
many regulations and standards, including PCI, HIPAA, FISMA and
a number of other federal, state and international regulations
and standards. To date, we have primarily focused on PCI
compliance, as it is among the best defined and broadest
reaching data security standards. Through this effort, we have
become a leader in facilitating PCI compliance, helping
organizations address the risks and challenges associated with
payment card fraud and compromise. Financial institutions are
generally responsible for the risk of payment card fraud or
compromise and security breaches involving their payment card
accepting customers to the extent they are unable to recover
losses from them or other parties. In turn, many of these
institutions rely on our knowledge and proprietary technology to
help their customers validate, achieve and maintain compliance.
We believe data security compliance represents a large and
growing addressable market, driven in part by PCI compliance.
For example, MasterCard estimates that its payment cards were
accepted at approximately 30 million locations worldwide as
of December 31, 2010. We expect financial institutions to
increasingly enforce PCI compliance among their payment card
accepting customers. In addition, we believe that the number of
locations where data is stored or transmitted, and consequently
require protection, will continue to increase for financial
transactions, as well as health care, government and other
services.
Our solutions include our industry leading software-as-a-service
TrustKeeper compliance management offering along with a
comprehensive suite of proprietary compliance enablement
solutions. TrustKeeper and the TrustKeeper Agent assist
organizations in validating compliance by analyzing, aggregating
and reporting on prohibited data storage, systems configurations
and security policy settings on subscribers systems in
centralized or distributed IT environments. In addition, our
compliance enablement offerings provide a comprehensive,
integrated turnkey suite of data security solutions, including
encryption, extensible threat management, security information
and event management, network access control, web application
firewalls and data loss prevention. These solutions help address
vulnerabilities detected by TrustKeeper, allowing our customers
to achieve and maintain compliance.
We serve customers of all sizes, from eight of the top ten
Fortune 500 companies in 2010 to small- and medium-sized
businesses and other organizations. Our customers include
subscribers, which are businesses, government entities and other
organizations that purchase our subscription services either
directly or are provided our service through a member of our
partner network, as well as purchasers of our professional
services or perpetual-license products. Examples of our
customers include financial services companies, franchised
restaurants, hospitality chains, hospitals and physician
networks, technology, media and telecommunications companies,
educational organizations and retail operations.
We have reached many of our customers through our partner
network, which is comprised of approximately 75 organizations
influential to the compliance and data security mandates of
their customers. Our PCI partner network includes many of the
worlds leading financial institutions, major payment card
companies, and other members of the payment and IT ecosystem,
which we believe expands our global reach and reputation. In
addition to PCI, we
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plan to expand our partner network in health care, government
services and other sectors, facilitating the distribution of our
solutions that address relevant regulations and standards, such
as HIPAA and FISMA.
We had approximately 1.8 million enrollees in our
TrustKeeper solution as of March 31, 2011. These primarily
consisted of payment card acceptance locations, the majority of
which were identified by our partner network as requiring PCI
compliance services. Each payment acceptance location of a
subscriber is generally counted as a separate TrustKeeper
subscription when either one of our partners or the subscriber
has initiated payment for our service. As of March 31,
2011, over 900,000 of our enrollees had TrustKeeper
subscriptions.
Set forth below in alphabetical order and by the geography in
which we primarily serve them is a sample of organizations that
we believe are important participants within the payment and IT
ecosystem with which we do business as a direct customer, most
of which are also members of our partner network:
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North America
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American Express*
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JPMorgan Chase*
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Banc of America Merchant Services*
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MICROS Systems*
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Discover*
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Moneris*
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EVO
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Sage Payment Solutions*
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Fifth Third Processing Solutions*
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TSYS Merchant Solutions*
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First American Payment Systems*
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U.S. Bank*
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First Data Corporation*
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Visa
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Global Payments*
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Wells Fargo*
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Rest of World
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Atos Worldline*
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Nordea Bank*
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Barclays Capital Services
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Redecard
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China UnionPay Data
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Swedbank*
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Cielo
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Transbank
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First National Bank (South Africa)
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WorldPay (UK) Limited*
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* Indicates a member of our
partner network.
We estimate that there were approximately 6 million payment
card acceptance locations within our existing PCI partner
network as of March 31, 2011. A number of our partners are
in the midst of a multi-year effort to monitor and enforce PCI
compliance among their payment card accepting customers, and in
turn we expect the number of subscriptions to increase, although
we do not expect this effort will result in all of them becoming
enrollees and some may already be covered by our enterprise
arrangements.
Our revenue increased from $58.3 million in 2008 to
$73.1 million in 2009 and $111.5 million in 2010, and
our net loss for each of those years was $2.0 million,
$1.5 million and $4.6 million, respectively. In the
same periods, our Adjusted EBITDA increased from
$0.4 million in 2008 to $3.1 million in 2009 and
$4.9 million in 2010. We believe Adjusted EBITDA is useful
to investors in evaluating our operating performance. Adjusted
EBITDA should not be considered as an alternative to net income
(loss), which is the most directly comparable financial measure
calculated in accordance with GAAP, or any other measure of
financial performance calculated in accordance with GAAP. For a
discussion of Adjusted EBITDA and a reconciliation of Adjusted
EBITDA to net loss, see note 3 to the tables included in
Summary Historical and Pro Forma Consolidated Financial
Data.
Industry
Background
Increasing
data security threats have led to a heightened regulatory and
compliance environment
Organizations are generating, using and storing escalating
volumes of digital data, which can be accessed on an increasing
number and variety of endpoint access devices. IDC estimates
that the amount of digital content created in 2020 will be
nearly 44 times that created in 2009. As society continues to
become more comfortable digitizing sensitive and proprietary
data such as financial data, medical records and trade secrets,
there is an increasing need for data protection and security.
IDC estimates that almost 50% of the information created in 2020
will require a level of IT-based security beyond a baseline
level of virus protection and physical protection, up from 30%
in 2009.
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Organizations are also increasingly reliant on interconnected IT
and business infrastructure to efficiently and competitively run
their operations. As the number of endpoint access devices grows
and organizations open their networks to more seamlessly conduct
business with partners, customers and suppliers, they expose
their IT infrastructure and data to increased security risks. In
addition, the rise of mobile devices and social networking poses
new challenges for organizations by facilitating the ability of
employees to access and expose sensitive information with
greater ease and unintended consequences.
Concurrent with the proliferation of digital data, security
threats continue to become more sophisticated, numerous and
severe. Threats emanate from many internal and external sources,
including organized cyber-criminals, hostile governments,
disgruntled employees and unintended internal errors. Although
many are not reported or well publicized, some security breaches
have made headlines, such as the publishing of government and
business documents by WikiLeaks. A breach of an
organizations IT infrastructure can lead to significant
economic losses, reputational damage, unavailability of critical
business systems and loss or compromise of confidential data.
According to the U.S. Director of National Intelligence, as
of February 2011, almost two-thirds of U.S. companies
reported being victims of cybersecurity incidents or information
breaches in the past year. According to data gathered by
DataLossdb, a collector of information regarding data loss, in
the past five years the top 10 largest reported security
breaches resulted in the loss of over 400 million records,
including payment card numbers, social security numbers and
banking information. These security breaches come at a
significant cost. Data breaches cost companies an average of
$214 per record, including $141 of indirect costs such as higher
turnover of customers, according to the Ponemon Institute. As a
result, we believe organizations are increasingly investing in
their data security initiatives to protect their information
assets. In addition, regulatory bodies and industry standards
groups are creating compliance requirements designed to help
combat ever-evolving security threats by creating a baseline for
data security.
Regulatory
and compliance requirements are becoming increasingly complex
and challenging to achieve and maintain
Existing and expanding laws, regulations and industry standards
mandate that organizations protect the information transmitted
and stored on their systems. These laws, regulations and
standards were created to safeguard the privacy of individuals,
protect against fraudulent acts, ensure trust in processes and
systems and increase awareness of data security threats.
In order to protect constituents from the continuously evolving
and changing threat landscape, these compliance rules are
frequently updated and revised, posing serious challenges for
organizations to reach and maintain compliance. Based on data
compiled by the United Compliance Framework, the number of
regulations, standards, guidelines, best practices and audit
guides for addressing data security and breach notifications
increased almost eight-fold from 119 documents released before
2006 to 890 documents released as of March 31, 2011.
Important data security laws, regulations and standards include:
Payment Card Industry Data Security
Standards. Many risks and challenges
associated with payment card fraud or compromise exist, such as
the monetization of payment card data by hackers, mass consumer
impact of security breaches, on-line payment card processing and
a historical lack of focus on data security by retailers and
other merchants. To address these risks and challenges, a set of
detailed requirements for enhancing data security throughout the
global payment system was created by the PCI Council, an
industry organization founded by American Express, Discover, JCB
International, MasterCard and Visa. The PCI standards apply
globally to all organizations that accept, store or transmit
cardholder data, regardless of the size of the organization or
the number of transactions they process.
Health Insurance Portability and Accountability
Act. HIPAA privacy and security rules were
created to address the risks and challenges associated with the
misuse of confidential patient records. This invasion of privacy
can result in adverse consequences, such as discrimination due
to illness or disabilities and exclusion of health coverage for
preexisting health conditions. HIPAA provides federal
protections for personal health information held by covered
entities and gives patients an array of rights with respect to
that information. The security rules specify a series of
administrative safeguards for covered entities such as
hospitals, doctors offices and health insurance providers
in order to protect patient health information.
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Federal Information Security Management
Act. Misappropriation of government
information can facilitate terrorism, propagate national
security threats and compromise confidentially of contracts. To
address these risks and challenges, FISMA requires each federal
agency to develop, document and implement an agency-wide program
to provide data security for the information and information
systems that support the operations and assets of the agency,
including those provided or managed by another agency,
contractor or other source.
Other Federal, State and International
Laws. States have begun enacting stricter and
more comprehensive data security laws, with at least three
states having codified all or some portion of the PCI standards.
A number of states have adopted more comprehensive data security
laws that range from statutes that create a liability safe
harbor for PCI compliant businesses, to laws requiring companies
to implement comprehensive information security programs. Over
45 states have enacted legislation requiring notification
of security breaches involving personal information. In
addition, there are numerous other federal and state data
security laws, including the Gramm-Leach-Bliley Act and state
privacy laws. Privacy laws have been adopted in a number of
other countries, most notably in Europe. The European Union has
adopted a data privacy directive that requires member states to
impose restrictions on the collection and use of personal data
that, in some respects, are more stringent and impose more
significant burdens on subject businesses than current privacy
standards in the U.S.
While all of these standards and regulations are becoming more
pervasive, PCI has been among the best defined and broadest
reaching data security standards thus far. PCI compliance is
required for any business, government entity or other
organization that wishes to accept payment cards, and financial
institutions are increasingly enforcing PCI among their payment
card accepting customers. Many of the major data security
regulations that were introduced prior to PCI, namely the
Gramm-Leach-Bliley Act, HIPAA and regulations by the Federal
Financial Institutions Examination Council primarily focused on
the financial and healthcare industries, which we believe
represents less than 15% of all U.S. firms based on an
analysis of 2007 U.S. Census Bureau statistics of
U.S. firms by NAICS classification codes. Given the wide
range of industries accepting payment card transactions,
including retail, hospitality, healthcare, government,
education, utilities and petroleum, we estimate the introduction
of PCI dramatically increased the number of organizations
subject to a data security compliance standard to more than 50%
of all U.S. firms, making PCI one of the broadest reaching data
security standards to date. Notwithstanding these controls,
payment card information continues to be an increasingly popular
target for sophisticated hackers. As a result, the PCI Council
frequently updates the requirements for organizations to achieve
and maintain PCI compliance.
PCI compliance benefits businesses, organizations, banks,
payment service providers and consumers by strengthening the
card payment system. Compliance helps prevent fraud and
compromise, increases the confidence of all parties in the
payment system, and reduces the time and other resources
involved in replacing payment cards and otherwise dealing with
payment card fraud and compromise situations.
The consequences of PCI non-compliance impact a number of the
participants in the payment card system. Financial institutions
are generally responsible for the risk of payment card fraud or
compromise and security breaches involving their payment card
accepting customers to the extent they are unable to recover
losses from them or other parties. In addition, in certain cases
payment service providers, which offer businesses and other
organizations services for accepting electronic payments, are
also responsible for such losses. Managing and ensuring PCI
compliance among their customers is important to financial
institutions and payment service providers as they seek to
manage and reduce their risk profiles. The consequences of PCI
non-compliance for their payment card accepting customers
include the risk of financial loss, bankruptcy, additional fees,
brand damage, business disruption and the inability to accept
payment cards from their customers.
Incorporating regulatory requirements into governance and
business processes requires deep knowledge of the regulations,
industry standards and potential implications to an
organizations IT infrastructure. In addition, working
through any compliance initiative can consume an
organizations personnel and financial resources. Many of
these affected organizations, especially small- and medium-sized
businesses and local storefronts of distributed organizations,
may not have fully addressed data security prior to PCI, and
therefore may lack the knowledge and tools needed to identify
and remediate increasingly complex threats.
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Many
existing compliance and data security solutions are highly
complex and expensive
Challenges of many existing data security compliance solutions
include that they are:
Highly complex and
inflexible. Compliance management and
enablement may involve the need to conduct lengthy evaluations
and apply multiple on-premise point products often from
different vendors, as many vendors lack an integrated suite
solution to address compliance. In addition, there are limited
on-demand solutions that provide the flexibility that comes from
modular functionality, which would enable businesses to access
real-time, service-based solutions as needed.
Expensive and resource
intensive. Attaining and maintaining
compliance can be difficult, time consuming and expensive and
involve multiple on-premise point products from different
vendors. In addition, ongoing maintenance and upgrades may be
costly, adding to the high total cost of ownership of a
comprehensive solution. Further, compliance management and
enablement usually requires the assistance of an IT staff with
extensive knowledge of the regulations, industry standards and
potential implications for IT infrastructure.
Not designed to facilitate ongoing
compliance. Many organizations discover that
they have few, if any, solutions to effectively help them manage
and maintain compliance after undertaking the costly and
time-consuming task of achieving compliance. As data security
threats become more sophisticated and compliance requirements
evolve, significant financial and personnel resources may be
required to ensure compliance is maintained.
Challenging to deploy within distributed, heterogeneous
environments and small- and medium-sized
organizations. Controlling and monitoring
common standards across multiple locations requires monitoring
the equipment deployed, security policies enforced and data
stored at each location. Implementing a centralized compliance
resource to monitor and inventory each system of a multi-site
organization is costly to implement and maintain. In addition,
the cost, complexity, required security and compliance know-how,
as well as resource-intensive and time consuming implementation,
of most existing solutions make them impractical for many
organizations.
Market
opportunity
We believe there is an increasing need for on-demand, scalable,
automated and cost-effective data security compliance solutions
that can help organizations address these challenges in real
time and simplify the process for validating, achieving and
maintaining compliance. Organizations of all sizes face similar
regulatory and compliance requirements. In addition, these
organizations confront a similar threat landscape, which raises
the importance of heightened security.
We believe the market for compliance management and compliance
enablement solutions represents a large and growing market
opportunity. According to IDC, the total governance, risk and
compliance infrastructure software market is expected to grow
from $17.3 billion in 2009 to $34.5 billion in 2014,
representing a compound annual growth rate of 14.8%. We believe
that the governance, risk and compliance infrastructure software
market, and the software market generally, will continue to see
increased growth and adoption of on-demand solutions as compared
to traditional on-premise solutions. According to IDC, the
software-as-a-service, or on-demand, software market is expected
to grow from $13.1 billion in 2009 to $40.5 billion in
2014, representing a compound annual growth rate of 25.3%.
With respect to PCI, we believe compliance represents a
particularly large addressable market. For example, MasterCard
estimates that its payment cards were accepted at approximately
30 million locations worldwide as of December 31,
2010. We believe that the number of locations where data is
stored or transmitted, and consequently require protection, will
continue to increase for financial transactions, as well as
health care services, government and other services.
Our
Solutions
Our enterprise-grade suite of data security compliance solutions
enables organizations of all sizes to meet the challenges of
securing their critical data, and to validate, achieve and
maintain compliance with industry standards
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and regulations. Our solutions comprise both compliance
management and compliance enablement offerings and some include
a service component through our security professionals or secure
operations centers. Our easy-to-use compliance management
solutions simplify this complex process by analyzing and
reporting on a businesss adherence to data security
standards and regulations. These compliance management solutions
can check for prohibited data storage, systems configurations
and security policy settings on a multitude of systems utilized
by small through large enterprises, including those that operate
from numerous sites. Our compliance enablement offerings
comprise a broad suite of integrated data security solutions
tailored to help businesses become compliant in a cost-effective
manner without the need to deploy and integrate multiple point
products.
Key differentiators of our solutions include:
Simplifying complex compliance
processes. Our on-demand solutions simplify
and automate complex compliance processes by facilitating
completion of compliance assessments, automating the diagnosis
of an organizations security posture and providing
easy-to-understand
actionable information. Our TrustKeeper solution translates
lengthy, technical questionnaires into intuitive questions on
basic business operations. As we gain insight into the security
posture of a business through our automated process, we offer
the required solutions and services to remediate identified
vulnerabilities and achieve and maintain compliance throughout
the contract term. Many of our solutions are delivered as a
service, simplifying implementation and facilitating use, which
is particularly important to businesses and other organizations
with limited IT resources and personnel.
Scalable and flexible. Our solutions
are designed to satisfy our customers needs as their
businesses grow and to address the needs of organizations with
complex, geographically dispersed and heterogeneous IT
infrastructures, regardless of size. As organizations expand,
and their security requirements increase, we are able to satisfy
our customers demands throughout their lifecycle. In
addition, our solutions are designed to be rolled-out to
thousands of branches or offices of large enterprises.
Cost-effective to achieve and maintain
compliance. We provide our customers with
many cost-effective solutions delivered as a service,
eliminating much of the need for up-front infrastructure costs
to achieve and maintain compliance. Our integrated solutions
identify and help remediate security vulnerabilities and
non-compliant policies, and reduce the need for in-house
personnel resources and
out-of-pocket
costs to monitor and demonstrate on-going compliance.
Comprehensive and integrated
solutions. We offer a broad suite of
compliance solutions that typically work together in an
integrated fashion to identify non-compliant areas and remediate
data security vulnerabilities utilizing a variety of delivery
options, including multi-tenant on-demand, software agent or
software management systems, hardware appliances and managed
options. Our solutions analyze, aggregate and report on
prohibited data storage, systems configurations and security
policy settings on systems across centralized or distributed IT
environments with enhanced reporting and tracking capabilities.
Up-to-date
information is routed to a centralized management solution,
thereby providing real-time compliance monitoring.
Trusted brand. We are a leading
provider of on-demand data security compliance solutions,
endorsed by and marketed through many of the worlds
largest, most trusted financial institutions and other
well-known organizations with whom we partner to deliver our
solutions. Our payment services customers include financial
institutions, such as Banc of America Merchant Services,
Barclays Capital Services, JPMorgan Chase, First National Bank
(South Africa), Nordea Bank, Swedbank, Transbank, U.S. Bank
and Wells Fargo; American Express, Discover, Visa and other
major payment card companies; and other members of the payment
and IT ecosystem, such as Atos Worldline, China UnionPay Data,
Cielo, EVO, Fifth Third Processing Solutions, First American
Payment Systems, First Data Corporation, Global Payments,
Moneris, MICROS Systems, Redecard, Sage Payment Solutions, TSYS
Merchant Solutions and WorldPay (UK) Limited. Many of these
organizations are also members of our partner network and market
our solutions to their payment card accepting customers to help
them achieve and maintain compliance. Use of our solutions by
Fortune 500 enterprise customers enhances our credibility in the
marketplace and our ability to effectively market to
organizations of all sizes. Additionally, organizations are able
to communicate to their customers the steps that they have taken
to protect sensitive data by displaying the Trustwave Trusted
Commerce seal, which had approximately 4.5 billion
impressions in 2010. Our brand credibility is further supported
by our SpiderLabs team, a leader in analyzing security threats
and incident
89
response. Members of our SpiderLabs team are often featured as
speakers at significant industry events, such as the Black Hat
Technical Security and DEF CON conferences.
Differentiated proprietary knowledge and
technology. Our large, global customer
footprint gives us visibility into existing and potential
threats. Our threat visibility is enhanced by our SpiderLabs
team, which performed approximately 150 security breach
investigations and approximately 1,400 ethical hacking projects
in 2010. This allows us to proactively develop our solutions to
address specific customer needs and protect against the latest
security threats. We have earned numerous industry awards and
certifications, including recognition as a leader in data
security compliance. Our proprietary technology is based on a
broad portfolio of intellectual property, which includes 18
issued patents and 28 patent applications pending in the United
States.
Our
Business Model
To complement our data security compliance solutions, we have
developed a differentiated business model that has the following
attributes:
Differentiated
go-to-market
strategy. We have developed a partner network
comprised of a number of the worlds largest financial
institutions, payment service providers and other organizations
influential to the compliance and data security mandates of
their customers. These organizations serve as differentiated and
cost effective distribution partners for us, and we typically
co-brand and co-market with these organizations to their
customers. Financial institutions are generally responsible for
the risk of payment card fraud or compromise and security
breaches involving their payment card accepting customers to the
extent they are unable to recover losses from them or other
parties, and many of them rely on our knowledge and proprietary
technology to help these customers validate, achieve and
maintain compliance. A number of our current enterprise
customers with multiple franchises or locations, such as
restaurant chains, retailers and hospitality chains, also serve
as key distribution partners when central management rolls-out
or recommends our solution to their numerous locations.
On-demand delivery model. Many of our
solutions are delivered on-demand, including our
software-as-a-service TrustKeeper solution, which is offered
through a subscription over the Internet using a multi-tenant
architecture. This model allows us to quickly deliver a modular
service to which organizations can easily subscribe without
significant upfront capital investment or the requirement for
professional services to integrate software or appliances into
their environment. Our subscribers can be up and running quickly
after contracting with us, and generally need no prior training
to use our solutions. Our on-demand solutions enable small- and
medium-sized organizations with more limited resources to
effectively adhere to todays complex security and
compliance standards. Our subscription-based model provides us
with a significant level of revenue visibility.
Initiate and build upon subscriber
relationships. We typically initiate a
relationship with a subscriber through one of our network
partners by offering our compliance management solution. We then
build upon our relationship by offering our subscribers
integrated compliance enablement solutions to cost-effectively
enhance their security posture and help them achieve and
maintain data security compliance. Further, through our
subscribers use of our compliance management offerings, we
gain insight into their data security compliance requirements
and can efficiently and effectively offer them the most
appropriate solutions that address their needs. This model
drives an efficient sales and marketing function and allows us
to achieve lower sales and marketing costs as a percentage of
sales compared to many of our on-demand peers.
Global delivery capabilities. As of
March 31, 2011, we served customers in approximately 65
countries through employees and dedicated third-party support
located in approximately 20 countries, and we offered our
TrustKeeper solution in nine different languages. We believe our
on-demand delivery model allows us to efficiently serve
organizations of all sizes worldwide. For the year ended
December 31, 2010, 15% of our revenue was generated outside
of North America.
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Our
Growth Strategy
Our goal is to be the leading global provider of data security
compliance solutions. The following are key elements of our
growth strategy:
Grow subscriber base within existing partner
network. We plan to grow our subscriber base
globally by converting more of our PCI partner network payment
card acceptance locations into TrustKeeper subscriptions. We
estimate that there were approximately 6 million payment
card acceptance locations within our existing PCI partner
network as of March 31, 2011. A number of our network
partners are in the midst of a multi-year effort to monitor and
enforce PCI compliance among their payment card accepting
customers, and in turn we expect the percentage of these
locations enrolled to increase, although we do not expect this
effort will result in all of them becoming enrollees and some
may already be covered by our enterprise arrangements. We had
approximately 1.8 million enrollees in our TrustKeeper
solution as of March 31, 2011. These primarily consisted of
payment card acceptance locations, the majority of which were
identified by our partner network as requiring PCI compliance
services. Each payment card acceptance location of a subscriber
is generally counted as a separate TrustKeeper subscription when
either one of our partners or the subscriber has initiated
payment for our service. As of March 31, 2011, we had over
900,000 TrustKeeper subscriptions, and approximately 900,000
enrollees that did not have a subscription. We plan to continue
our marketing efforts to many of the enrollees who have not
elected to become subscribers as well as other potential
customers in the markets we serve.
Build upon relationships with existing subscriber
base. Our subscribers and our partner network
benefit from effective, affordable and
easy-to-deploy
security solutions to attain and maintain compliance with the
myriad regulations and standards in effect today. We believe
that our compliance management solutions will continue to
generate cross-selling opportunities to our installed base of
our comprehensive suite of compliance enablement solutions as
subscribers seek to remediate vulnerabilities identified by the
compliance management process. In addition, we anticipate
further expansion into the network of branches and franchises of
our distributed enterprise customers.
Expand portfolio of new
technologies. Our large, global customer
footprint gives us visibility into existing and potential
threats, which is enhanced by our SpiderLabs team. As a result,
we expect to continue to enhance our solutions to address
specific customer needs and the latest security threats. For
example, we plan to develop solutions with more advanced
authentication and
end-to-end
encryption that further enable secure
point-to-point
communications. The capabilities and knowledge we have developed
are also applicable to other data security regulatory
requirements, as many of these data security regimes are based
on similar underlying requirements. Some of our products that
are designed to address compliance with PCI can also be utilized
by our customers to address compliance with certain requirements
of other regulations and standards. We plan to leverage our
expertise in addressing PCI compliance to further expand our
offerings in other data security regulatory regimes such as
HIPAA and FISMA, among others. In addition, we plan to continue
to selectively pursue acquisitions of technologies that bolster
and complement our data security compliance solutions.
Extend our partner network. We plan to
continue to seek additional partners to reach more payment card
acceptance locations worldwide. We believe that an increasing
number of our current enterprise customers with multiple
franchises or locations, such as restaurant chains, retailers
and hospitality chains, will also serve as key distribution
partners, when central management rolls-out or recommends our
solutions to their numerous locations. Additionally, we plan to
develop partner networks in health care, government services and
other sectors, facilitating the distribution of our solutions
that address relevant regulations and standards, such as HIPAA
and FISMA.
Expand internationally. Our revenue
from customers outside of North America has grown from
$10.4 million in 2008 to $16.8 million in 2010, an
increase of 62%. We plan to increase our international presence,
primarily by growing our presence in the approximately 65
countries in which we have customers. We also plan to
selectively introduce our services in additional countries where
the scope and adoption of security and compliance solutions
continue to increase, largely by leveraging our partner network.
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Products
and Services
We offer a broad suite of compliance management and compliance
enablement solutions through a number of delivery methods. These
delivery methods include:
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Multi-tenant on-demand: Our solutions are
often delivered on-demand over the Internet during the
subscription period. This simplifies implementation and use,
which is particularly important to businesses and other
organizations with limited IT resources and personnel.
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Software agent or software management
system: Certain of our applications require
software to be downloaded over the Internet or shipped and
installed on the customers IT systems. For some
applications, this software can relay information to us, thereby
improving our ability to monitor our customers operations
and to integrate our solutions more effectively.
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Hardware appliance: In certain cases, we offer
hardware appliances that are deployed at a customers site,
consisting of hardware devices that run proprietary Trustwave
software that can be configured for those devices. Our customers
are able to purchase these appliances through us, but the
hardware we use, such as servers acquired from third-party
providers, is typically commercially available without
custom-built components.
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Trustwave-managed option: We are able to
assist, in many cases remotely, in the initial configuration,
delivery, ongoing maintenance and event monitoring for many of
our solutions, thereby simplifying the deployment and
administration of those solutions. This service is offered on a
subscription basis.
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92
The table below identifies our compliance management and
compliance enablement solutions and their respective delivery
methods:
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Delivery Method
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Software Agent
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Trustwave-
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Multi-Tenant
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Or Software
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Hardware
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Managed
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Solutions
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on-Demand
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Management System
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Appliance
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Option
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Compliance Management:
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TrustKeeper
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ü
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TrustKeeper Agent
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ü
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ü
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Compliance Validation Services
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ü
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Compliance Enablement:
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Security Information & Event Management
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ü
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ü
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ü
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Intrusion Prevention and Intrusion Detection
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ü
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ü
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Unified Threat Management and Extensible Threat Management
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ü
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ü
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Web Application Firewall
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ü
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ü
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SSL Certificates
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ü
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SSL Lifecycle Manager
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ü
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Two-Factor Authentication
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ü
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Full Disk Encryption
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ü
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ü
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ü
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Persistent File Encryption
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ü
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ü
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ü
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End-to-End
Encryption
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ü
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Tokenization
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ü
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Data Loss Prevention
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ü
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ü
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DataControl
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ü
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Network Access Control
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ü
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ü
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Secure Email
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ü
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Internal Vulnerability Scanning
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ü
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ü
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External Vulnerability Scanning
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ü
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|
While our compliance management and compliance enablement
capabilities can be sold individually, many times they are
bundled together in a subscription offering to provide
subscribers with a more comprehensive and cost-effective
solution to validate, achieve and maintain compliance with data
security regulatory requirements and industry standards.
Additionally, the insights we gain through our SpiderLabs team
and other security consulting services are leveraged across many
of our products to enhance their effectiveness.
Compliance
Management Capabilities
TrustKeeper®
TrustKeeper, our SaaS compliance management solution, is an easy
to use, highly-scalable, centralized solution that analyzes an
organizations network infrastructure and security
practices and profile in order to detect security
vulnerabilities and compliance with data security standards and
regulations. TrustKeeper is designed for users without
specialized computer, compliance or data security training or
expertise. Without a solution such as TrustKeeper, organizations
would typically need to complete lengthy, technical
questionnaires and assessments about their network and security
practices in order to assess whether they are compliant with
regulatory requirements and industry regulations. TrustKeeper is
available to subscribers throughout the term of their
subscription period, which often is one year.
93
TrustKeeper provides actionable information to help a subscriber
understand its risk profile and actions that may be necessary to
remediate any vulnerabilities or non-compliant areas. In the
case of PCI, TrustKeeper simplifies the compliance process by
guiding the user through a series of simple questions designed
to identify how the organization accepts and processes payments.
Based on the users responses, TrustKeeper determines the
appropriate compliance questionnaire, analyzes the
organizations network infrastructure and security
practices and automatically populates answers to the
questionnaire based on information gathered during the analysis.
TrustKeeper utilizes our vulnerability scanning engine which
tests for critical system, network and application-level
vulnerabilities, and is constantly updated based on new
information from the National Vulnerability Database, our vendor
partnerships and original research by our SpiderLabs team. The
scan engines adaptive capability allows it to discover and
apply information about a network environment to the scans,
reducing the number of false vulnerabilities.
TrustKeeper provides a compliance status report to the user, and
when the analysis detects deficiencies and vulnerabilities,
TrustKeeper provides remediation recommendations to help the
organization become PCI compliant. The reports prioritize scan
findings in order to provide timely, actionable information to
help users manage vulnerabilities efficiently.
TrustKeeper is currently available in nine languages, including
English, Spanish, French, Portuguese, Swedish, Norwegian,
Polish, German and Dutch, and we are actively working to add six
additional languages, including Japanese and Chinese, by the end
of 2011.
TrustKeeper®
Agent
Our
TrustKeeper®
Agent solution can be downloaded over the Internet and works in
tandem with TrustKeeper to continuously monitor network and
system compliance policies and to accelerate an
organizations compliance process. TrustKeeper Agent can be
installed on systems, such as
point-of-sale
terminals, to perform local policy checks and inspections. These
assessments complement the TrustKeeper network vulnerability
scans. Whereas TrustKeeper assesses the security and
vulnerability of an organizations network and systems from
the outside (for example, from the perspective of a hacker),
TrustKeeper Agent inspects and monitors the data security of an
organization from the inside.
TrustKeeper Agent facilitates compliance by enabling:
(i) the scanning of systems for forbidden data, such as
payment card track data; (ii) the reporting of a
systems security settings such as passwords, user
accounts, configurations and other settings; (iii) the
automatic detection of which payment application and version is
installed and reporting on whether that application is a PCI
compliant payment application; (iv) the validation of
security settings against specific compliance requirements;
(v) the monitoring of locations and networks for the
presence of unauthorized devices, such as an unauthorized
wireless access point; (vi) external vulnerability scanning
of locations that connect to the Internet through broadband
Internet service providers (ISPs) and as a result have dynamic
IP addresses; (vii) file integrity monitoring to detect
unauthorized modifications to sensitive files, such as operating
system files; and (viii) the collection, transport, and
management of log data. Because TrustKeeper Agent can scan,
aggregate and report back on individual terminals and devices,
it is particularly helpful to the compliance initiatives of
enterprises, acquiring banks and other large organizations in
managing compliance among a large group of departments,
franchises or retail outlets.
Compliance
Validation Services
Enterprise customers present more complicated security and
compliance challenges due to their complex IT environments. In
particular, in addition to the other requirements covered as
part of their subscription, large organizations and service
providers are also required to obtain an
on-site
validation by a Qualified Security Assessor in order to become
and remain compliant under PCI. Our security professionals are
able to guide enterprise customers through the compliance
validation process by leveraging TrustKeeper and a purpose-built
compliance validation solution manager tool that customers can
utilize to monitor compliance throughout the subscription
period. Our approximately 85 security professionals had, as of
March 31, 2011, on average, 11 years of security
experience, and most have achieved one or more of the following
certifications: Qualified Security Assessor, Certified
Information Systems Security Professional, Certified Information
Security Manager and Certified Information Security Auditor.
94
Compliance
Enablement Capabilities
Our compliance enablement solutions help organizations of all
sizes secure their sensitive data, enhance their overall
security posture and meet ongoing data security compliance
requirements in a cost-effective and efficient manner. Our
solutions can be delivered in concert to provide a comprehensive
compliance solution through a set of management platforms that
allow them to be monitored and managed from integrated consoles
by both customers and our managed services personnel. Our
enablement solutions are often delivered as a service,
simplifying implementation and facilitating use, which is
particularly important to organizations with limited IT
resources and personnel. We are able to remotely assist in the
initial configuration, ongoing maintenance and event monitoring
for many of our solutions. In addition, certain of our
enablement solutions are offered through perpetual software
licenses, coupled in certain cases with the sale of associated
hardware appliances. Our compliance enablement solutions are
discussed below.
Security
Information & Event Management
Our security information & event management,
SIEM, solution collects streaming activity data,
often referred to as events and logs,
from the devices, applications and other elements in an
organizations IT infrastructure and consolidates and
translates the streaming data into a common format to enable
analysis. A single device or application can generate thousands
of events in a single day, most of which are low priority and
typically provide information about a narrow aspect of the
infrastructure. Only a portion of events are associated with
threats or compliance risks. Our SIEM solution, through
sophisticated correlation technology, analyzes captured events
and logs to identify and prioritize high-risk activity and
present a consolidated view of IT security threats to the
business. By providing visibility into diverse devices,
applications and networks, our SIEM solution helps businesses
achieve more effective identification and mitigation of security
threats and compliance validation with numerous regulatory
requirements and industry standards. In addition, adhering to
forensic quality standards, Trustwave Security Data
Warehousetm
will file, secure, monitor and retain log data to satisfy
regulatory standards using optimized data compression and
indexing techniques. Our SIEM solution can be integrated with
our other solutions or solutions from third-party vendors to
enable real-time analysis and reaction to security threats
through policy-based event monitoring.
Intrusion
Prevention and Detection
Our intrusion prevention and intrusion detection solution is an
easy-to-deploy
and adaptive enforcement technology that complements an
organizations firewall perimeter. This solution supports
real-time updates to address vulnerabilities specific to a
customers network, thereby strengthening perimeter
defenses while cutting down on false threats that can interfere
with legitimate traffic. At the same time, our intrusion
prevention and detection solution monitors a customers
network and systems for evidence of attacks. This solution helps
control the risks associated with common vulnerabilities such as
email-borne viruses, infected laptops and human factors. The
intrusion prevention system is often installed near a network
gateway to inspect traffic and react in real time, and the
intrusion detection system is usually deployed to passively
perform analysis functions.
Unified
Threat Management and Extensible Threat Management
Our unified threat management, or UTM, solutions and
our extensible threat management, or XTM, solutions
provide multiple network security capabilities consolidated in a
single customer-deployed hardware appliance. In particular, our
UTM and XTM solutions perform firewall, log collection, gateway
anti-virus, virtual private network enablement, intrusion
prevention, remote access control and web content filtering
functions. In addition, we believe our XTM solutions are more
comprehensive than certain unified threat management products
offered by other vendors because our solutions also provide
internal vulnerability scanning and network access control
functionality.
Web
Application Firewall
Our Web Application Firewall, or WAF, solution
utilizes bi-directional traffic analysis, automated behavioral
profiling and multiple collaborative detection engines to
identify and protect against threats that can affect the
security, functionality and availability of a customers
web applications. This solution can be configured for a
customers specific
95
web applications in order to provide more advanced and
comprehensive protection than can be provided by a general
network threat management system. Our web application firewall
solution is deployed using a set of commercially available
appliances that run Trustwave-built software, and multiple
appliances can be deployed at a customer site to scale with the
number of web applications and servers in use. This solution can
be deployed and administered directly by the customer or by our
Managed Security Services team on the customers behalf.
SSL
Certificates and SSL Lifecycle Manager
Secure Sockets Layer, or SSL, certificates are
electronic documents which use a digital signature to bind
together a public cryptographic key with an identity and are
used to confirm the identity of a website or server, encrypt
data during transmission, and help ensure the integrity of
transmitted data. Our SSL certificates are used by organizations
worldwide to secure critical business information across
numerous communication protocols including email, web
transactions and management server interactions. SSL
certificates perform cryptographic authentication and encryption
operations to realize certain security goals, including data
confidentiality and machine authentication. Businesses use SSL
certificates to assure consumers of the validity, credibility
and security of their websites. As one of the top 10 global
Certificate Authorities, our SSL certificates are trusted by
more than 99% of web browser installations. We also offer
Extended Validation SSL certificates, which we believe are among
the most trusted and stringently-validated certificates
available today. To enhance trust in websites, the use of an
Extended Validation SSL certificate will result in the shading
of the Internet-address bar in the visitors web browser to
green to communicate the security of the site.
In addition, our SSL Lifecycle Manager solution monitors SSL
certificates deployed across an organizations network,
whether they were issued by us or another Certificate Authority.
This solution alleviates the burden of managing large
deployments of SSL certificates by automating the entire
certificate lifecycle, including discovery, analysis and
management.
Two-Factor
Authentication
In addition to a username and password, our authentication
service utilizes our SSL digital certificate technology to
provide a managed two-factor authentication system that works
without the need for hardware tokens. The solution leverages a
customers current virtual private network authentication
infrastructure, including its corporate directory system and
virtual private network hardware, and software allows users to
provision certificates over the Internet through our management
portal. The web portal allows administrators to enroll and
revoke access for an organizations remote workforce
quickly and easily.
Full Disk
Encryption and Persistent File Encryption
Our full disk encryption solution enables the complete
encryption of disk drives on laptops, desktops and servers using
government-standardized algorithms to provide high degrees of
protection. With this solution, all data, including the
operating system itself, is protected. Without the password, an
unauthorized user is unable to extract any information from a
protected disk drive. Our full disk encryption solution provides
an intuitive reporting system that allows enterprises to
validate device encryption for the purpose of complying with
breach notification laws and other regulations.
Our persistent file encryption, or PFE, solution
utilizes patent pending Smart
Tag®
technology to provide convenient and continuous protection for
files, folders, email attachments and removable device data.
Once a file or other data is protected, it remains protected as
it travels from servers and file shares in data centers to
endpoint devices (such as laptops and desktops), and it
continues to be secured as it exits the enterprise through email
or removable media. Our Smart
Tag®
technology enables persistent protection for files without
requiring software applications to be modified or requiring
users to perform manual actions to encrypt or decrypt data. Our
persistent file encryption solution provides other features as
well, such as fine-grained, dynamic, cryptographically-enforced
file access control, which enables an administrator to enable or
limit the access of users to specific files, and file usage
logging and reporting. The solution can be delivered as an
on-premise solution or a fully managed solution. If protected
data is shared outside the enterprise, we also offer a
web-downloadable application, Control Sentry, which
96
allows authorized partners and home users to access and modify
sensitive files. Control Sentry can also be automatically
embedded in removable media devices like USB drives to enable
use of portable protected data.
End-to-End
Encryption
Our recently introduced
end-to-end
encryption solution helps ensure the confidentiality of payment
transaction data and other data exchanges, such as medical
record exchanges. This solution consists of three major
components: a software-driven encryption component, an array of
decryption systems and a remotely accessible management system.
Other specialized hardware security modules may be deployed as
well for the protection of certain highly sensitive information
associated with the encryption process. Upon deployment to a
device, the software-driven encryption component identifies,
intercepts and encrypts transaction data that is processed at
the device. In a PCI scenario, this is often a
16-digit
payment card number that is entered into a
point-of-sale
system. The data remains encrypted across multiple devices,
networks and applications until it reaches the decryption
systems. This continuous protection overcomes deficiencies of
combinations of traditional encryption solutions that require
data to be decrypted and re-encrypted at various points along
the path of a transaction. Customers may deploy the solution on
point-of-sale
devices without necessarily requiring explicit integration with
payment application software or
point-of-sale
platforms, bundle the solution with TrustKeeper compliance
management services, and enable data to be encrypted without
changing the format or size of the data, which is often critical
to practical implementations.
Tokenization
Our recently introduced tokenization solution enables the
protection of sensitive data by representing selected data with
a unique corresponding identifier, i.e., a token,
for storage and data analysis purposes. Our tokenization
solution manages the conversion of sensitive data, such as
payment card numbers, into tokens. The process of creating
tokens is one way, in that the underlying technology
seeks to prevent unauthorized users from utilizing a token to
obtain or compute corresponding original sensitive data. In
addition, our solution creates tokens using the same encoding
schema and size of the original sensitive data to enable easier
integration with existing data analytics systems and databases.
The tokenization system can also be delivered within our
end-to-end
encryption solution to complement the transaction security
provided by that solution.
Data Loss
Prevention
Our data loss prevention, or DLP, solution detects
and analyzes sensitive data that is traveling over corporate
networks or stored on various enterprise devices. The key
capabilities of our DLP solution include monitoring and
reporting suspicious network behavior by a customers
employees and preventing unauthorized data sharing activities.
Also, our DLP solution is capable of identifying files, database
records and email communications containing cardholder data and
intellectual property. An appliance-based version of the
solution is deployed near Internet gateways to monitor web,
email and other network communication with the outside world. A
software version of the solution can be installed on data center
servers or endpoint devices such as laptops and desktops to
periodically scan stored data, such as files, for sensitive
content. Using a configuration that is tailored to each
customer, upon detecting sensitive data or misuse, this solution
acts on policies for protection, which may include quarantining,
blocking or informing on the existence of sensitive data.
DataControl
Our DataControl solution combines features of our DLP solution
and our PFE solution to provide enhanced data protection.
DataControl utilizes our DLP solution to scan enterprise devices
for sensitive data and, upon finding such data, executes on
policies to automatically encrypt and protect those files
through our PFE solution. This solution can be implemented
without requiring any user or administrator interaction. After
sensitive files are protected, they can be freely shared inside
and outside of the enterprise while guaranteeing compliance and
achieving strong security. Policies can be configured to align
with regulatory standards such as PCI and HIPAA, and a customer
can generate reports on all activity.
97
Network
Access Control
Our Network Access Control, or NAC, solution allows
a customer to govern who connects to its network, which devices
they use and which IT resources they are permitted to access.
The enterprise NAC solution is deployed with a distributed set
of sensor appliances that are all managed by a central
management server. With a proprietary method of detecting rogue
routers and user- and device-level authentication capabilities,
our NAC solution enables compliance with certain PCI
requirements. Our NAC product is a full-cycle solution, capable
of performing post-admission behavioral monitoring as well as
pre-admission checks, such as checks of open service ports,
Windows patches and the existence of firewalls, anti-virus and
anti-spyware capabilities.
Secure
Email
Through encryption, archiving and filtering, our on-demand
mailMAX solution mitigates exposure to risks associated with
confidential information sent through email, email-based
viruses, inappropriate content and spam. With this solution, a
subscribers email traffic is routed through Trustwave
servers running mailMAX software, thereby avoiding the need for
subscribers to deploy on-premise equipment.
Vulnerability
Scanning
Our internal and external vulnerability scanning, or
IVS and EVS, respectively, solutions
secure an organizations network and information by
proactively identifying weaknesses in its security posture. Our
IVS and EVS solutions are offered as fully managed services,
with a customer portal available for tasking, configuration and
remediation of findings. EVS is incorporated into our
TrustKeeper solution and views and scans customers
infrastructures from the outside. IVS, on the other hand, views
and scans network assets from behind the corporate perimeter
firewall, providing a comprehensive view of the customers
IT environment. IVS software is deployed on a Trustwave-provided
hardware appliance. Both services allow customers to maintain an
enterprise-wide scanning policy within a unified portal
framework by grouping scanning parameters into a set of
user-defined profiles.
Technology
Platforms for Integrated Product Delivery
We have built a set of management platforms that allow various
compliance enablement solutions to be monitored and managed from
integrated consoles by both customers and our managed services
team. These integrated consoles allow us to deliver security
capabilities as an integrated solution and at a lower cost than
loose bundles of security products. In addition to the
TrustKeeper portal, our web-based integrated management
platforms can be used by our personnel or by customers to
monitor product configurations, device status information and
events.
Trusted
Commerce®
Website Seal
Another component of some of our solutions is the Trustwave
Trusted
Commerce®
website seal. By displaying the Trusted Commerce seal on their
public-facing websites, subscribers are able to communicate to
visitors of those websites steps they have taken to protect
sensitive data. The Trusted Commerce seal can indicate whether
subscribers have enrolled in TrustKeeper to initiate the PCI
compliance process, if they have completed the steps to validate
compliance and whether they have taken steps to verify the
identity and security of their websites by using Trustwave SSL
certificates. The Trusted Commerce seal had approximately
4.5 billion impressions in 2010.
SpiderLabs
and Other Security Consulting
We offer a wide range of security consulting services to help
businesses analyze and test their current information security
controls and to provide guidance in remediating deficiencies.
Our SpiderLabs team offers forensic services and white
hat or ethical hacking services such as
penetration testing (network, wireless and application level)
and social engineering to identify any weaknesses in a
customers IT infrastructure that can be exploited by
hackers. Our SpiderLabs team performed approximately 150 data
security breach investigations and approximately 1,400 ethical
hacking exercises in 2010.
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We also leverage the experiences and insights of our SpiderLabs
team and security consultants to enhance our solutions. For
example, we offer a 360 Application Security program pursuant to
which SpiderLabs conducts secure code development training and
performs application code reviews and penetration testing of a
customers applications. Using the results, we configure
and deploy a WAF to address the customers specific
security needs. The WAF includes a virtual patching capability
that enables the solution to adapt in real time to new emerging
threats. We believe our ability to combine our security
consulting expertise with our compliance enablement capabilities
enhances our customers data security and is a significant
competitive advantage for us. We intend to continue to look for
opportunities to integrate our enablement capabilities with our
security consulting expertise.
Customers
Our customers include subscribers, which are businesses,
government entities and other organizations that purchase our
subscription services either directly or are provided our
service through a member of our partner network, as well as
purchasers of our professional services or perpetual-licensed
products. We serve customers of all sizes, from eight of the top
ten Fortune 500 companies in 2010 to small- and
medium-sized businesses and other organizations. Examples of our
customers include financial services companies, franchised
restaurants, hospitality chains, hospitals and physician
networks, technology, media and telecommunications companies,
educational organizations and retail operations of all sizes,
from multi-national entities to single-location small businesses.
As of March 31, 2011, we had over 900,000 subscriptions.
For the years ended December 31, 2008, 2009 and 2010, our
top ten customers accounted for 11%, 19% and 23% our of revenue,
respectively. Many of our top 10 customers are network partners
who purchase our compliance management solution for their own
businesses as well as on behalf of their organizational
customers. Except as discussed below, no customer accounted for
more than 10% of our revenues in the past three years or the
three months ended March 31, 2011. Our largest customer,
U.S. Bank, accounted for 11.0% of our revenue for 2009 and
10.3% of our revenue for the three months ended March 31,
2011.
Some representative examples of customer-use cases we address
include:
Partner Network. Our partner network,
which includes many existing direct customers, primarily
represents the largest channel relationships for enrolling new
businesses, government entities and other organizations into our
TrustKeeper compliance management solution. We have established
partner network programs with members of the financial and
payment industries as well as the IT ecosystem, where the
partners offer our TrustKeeper portal. While partner programs
differ, the initial contract term for a typical partner program
contract is three years, with automatic renewal provisions. Each
program has a set schedule of per-client pricing for the
TrustKeeper solution and typically includes a co-marketing
program to promote the service to the network partners
customers. Pricing for the partner program depends on numerous
factors, including the number of the partners customers
who are enrolled in the TrustKeeper portal each year, the level
of commitment or expectation by the partner to enroll or pay for
additional customers in current or future years, the level of
support required, and the specific services and products offered
within the program.
SMB. Many of our small- and
medium-sized subscribers are introduced to us through our
partner network. These businesses and other organizations
typically have limited, if any, dedicated security and
compliance staff. Although their IT systems may be on a smaller
scale than our larger enterprise customers, they face many of
the same threats and are subject to many of the same regulatory
requirements and industry standards as larger organizations. A
typical small- and medium-sized business subscriber is a
privately-held company, such as a barber shop, doctors
office, retail store or golf course. Through co-marketing
campaigns with our network partner, the subscriber learns about
our easy-to-use TrustKeeper portal and can access the portal
online to begin the compliance validation process. Although many
of these subscribers outsource their IT support, they use our
TrustKeeper solution to analyze their network infrastructure and
security practices in order to detect security vulnerabilities
and compliance with data security standards and regulations
throughout the subscription period. TrustKeeper provides
actionable information to help the subscriber understand its
risk profile and the actions that may be necessary to remediate
any vulnerabilities or non-compliant areas. At that point, the
subscriber may contract with us directly to purchase compliance
enablement solutions to remediate any of the identified
vulnerabilities or non-compliant areas.
Enterprise. One of our direct sales
professionals initiated a relationship with a large enterprise
customer in the food manufacturing industry. Through the
subsequent compliance management relationship, we identified
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certain security vulnerabilities and offered several of our
compliance enablement solutions as options to assist the
customer in remediating them. The customer then decided to
purchase several of our offerings through a three year bundled
subscription service, including our compliance validation,
TrustKeeper Agent, network access control, intrusion detection
and vulnerability scanning solutions.
Distributed Enterprise. Through one of
our direct sales professionals, we initiated a relationship with
a large distributed enterprise customer in the hospitality
industry when it engaged us to help validate, achieve and
maintain PCI compliance at its corporate data center. After our
review of the corporate office, we tailored a program to assist
the customer in validating compliance at hundreds of its remote
locations through our TrustKeeper solution. To remediate a
number of identified security vulnerabilities, the customer then
elected to roll out our managed UTM service to many of its
international locations. We anticipate providing this solution
to additional sites going forward.
Sales and
Marketing
Partner
Network
Our partner network is comprised of a number of the worlds
largest financial institutions and other organizations
influential to the compliance and data security mandates of
their customers. As of March 31, 2011, our partner network
was comprised of approximately 75 organizations, and during
2010, our five largest partner network members accounted for
15.7% of our revenue. Most of these organizations utilize our
solutions themselves, and often recommend us as the preferred
compliance solution provider to their customers. We often
co-brand and co-market our solutions with these organizations to
their customers, which serves as a differentiated and cost
effective distribution method for us. Our partner network is the
primary distribution channel for our software-as-a-service
TrustKeeper solution, especially for small- and medium-sized
businesses. In addition, we work with system integrators and
other technological resellers and associations that provide
complementary skills and expertise in certain industries or
regions in order to provide an additional distribution channel
for our compliance enablement solutions.
As of March 31, 2011, we employed a team of approximately
20 individuals that provides a structured framework to recruit,
enable and support our partner network. This team provides
technical support, education and training to our partner
network, and assists our partners with designing customized
marketing programs to increase compliance awareness.
Direct
Sales
As of March 31, 2011, our direct sales force was comprised
of approximately 75 sales professionals, including our sales
team for enterprises, governments and other organizations, our
inside sales force for small- and medium-sized business and our
presales and sales support operations. Our direct sales teams
are supported by marketing and product specialists, as well as
sales engineers that have in-depth knowledge about the functions
and features of our products. Our sales engineers assist in the
sales process with demonstrations, proof of concepts and
implementation discussions with prospective customers. Sales
cycles vary considerably by solution and by the size and
technical sophistication of the prospective customer. To support
our growth plans, we intend to continue to increase the size of
our direct sales force and the number of sales support personnel.
Marketing
To support our network partners and our direct sales effort, we
perform a number of additional marketing activities each year to
increase brand awareness and generate qualified leads, including
webinars focused on education; email campaigns; tradeshows and
conferences targeted toward horizontal and vertical market
segments; advertising and internet marketing programs leveraging
internet search engines and optimization programs to drive
traffic to our websites; and other brand awareness marketing
endeavors such as social media.
Product
Development
To offer our customers solutions that address the evolving
security threat environment and regulatory landscape and to
remain competitive in the data security compliance market, we
make substantial investments in product development. Our efforts
are focused on adding new features to existing solutions,
increasing the levels
100
of integration between our suite of solutions, making our
solutions easier to use for small- and medium-sized
organizations, improving the efficiency of our service delivery
platform and developing new solutions. We identify and develop
new and enhanced features, products and services based on our
insights into future security threats and vulnerabilities and
input from our product managers, who receive continuing feedback
from our customers. In addition, our SpiderLabs team is
responsible for identifying emerging threats and security
vulnerabilities and working with our product development team to
incorporate features into our solutions that are responsive to
the changing threat environment. Our success in designing,
developing and selling new and enhanced solutions will depend on
a variety of factors, including our ability to identify market
demand, timely implementation of product design and development,
product performance and our sales and marketing efforts.
Our product development organization is organized around small,
focused teams, including a dedicated architecture team that is
responsible for the development and maintenance of common
services that are shared across products. As of March 31,
2011, our product development team, including product
engineering and product management and strategy personnel, was
comprised of approximately 150 individuals. During 2008, 2009
and 2010, we invested $6.7 million, $9.1 million and
$20.1 million, respectively, in product development
activities.
Operations
and Technology
We maintain two data centers in the United States and a
satellite location in London, England. Our primary production
data center is located in suburban Chicago, Illinois and
features backup power, redundant network circuits and 24x365
system monitoring to help ensure application availability. Our
backup data center is located in downtown Chicago, Illinois and
is used for limited production services, disaster recovery,
testing and development purposes. Our backup data center has a
dedicated fiber connection and provides near-real time data
replication from our primary facility and has sufficient
capacity to handle our production data volumes in the event that
the primary facility becomes unavailable for any reason. For our
on-demand applications, we offer service level commitments of at
least 99.5% uptime every month, excluding designated maintenance
periods.
We have six customer support centers located in Chicago,
Illinois; Denver, Colorado; Austin, Texas; Reston, Virginia;
Cambridge, Ontario and Warsaw, Poland. Through these centers,
approximately 100 full-time professionals provide 24x365,
multi-language
support of our solutions for our customers. We also utilize an
outsourcing arrangement to provide additional overload coverage
during peak call periods for certain product offerings. Four of
the support centers house secure operation centers staffed by
our managed security services team to support our managed
services offerings. This team performs event and device
management and monitoring, customer threat analysis and
escalation, provisioning and project management for customers
with large deployments and service level agreement monitoring.
The principal technologies upon which our solutions are designed
and built are discussed below.
Compliance
Management Solutions
TrustKeeper is delivered as a multi-tenant architecture,
providing single sign-on and presenting the user with purchased
applications based on the subscribers profile. The entire
TrustKeeper architecture is services based and has been designed
to be flexible and scalable. The user interface is web-based and
designed to eliminate cross-browser compatibility issues and
support modular applications that fit seamlessly into the
overall TrustKeeper framework. For scalability and performance
reasons, all of the core TrustKeeper services are stateless in
design, with strict separation between service interfaces and
implementations, which allows service enhancements to be
deployed without intrusion. The back-end technology stack runs
on commercially available hardware. All applications share a set
of standardized, common services, which allows for the rapid
development and deployment of new applications and helps ensure
that applications behave consistently and integrate seamlessly.
TrustKeeper Agent is installed locally on a Microsoft Windows
PC. TrustKeeper Agent communicates with TrustKeeper for
configuration information and to receive software updates. As
its various modules run, TrustKeeper Agent sends critical
security and compliance information to the main TrustKeeper
servers for further analysis and reporting of results to
subscribers.
101
Compliance
Enablement Solutions
Our solutions are written in industry standard languages
including Java, C++ and C#, and many of our solutions, such as
our SIEM, WAF, SSL, NAC and secure email solutions, utilize the
MySQL database for persistence throughout all of the components
of the solution. In cases where we manage a customers
security solutions, appliances installed at the customers
site connect to our cloud-based management infrastructure using
secure reverse shell tunnels to reduce the need for direct
external access to these devices.
Development
Methodology
Our solutions are developed using an agile software methodology
that relies heavily on collaborative design, rapid prototyping,
iterative development and automated unit and integration
testing. In addition to using recognized software quality
assurance testing practices, prior to release our solutions are
subjected to rigorous security code reviews and penetration
tests by our SpiderLabs team. All production software releases
are deployed during scheduled change windows.
Competition
The market for data security compliance, including both
compliance management and compliance enablement, encompasses a
wide range of solutions, extends globally to both small and
large businesses and is subject to rapid changes in technology
and regulation. We therefore compete with a large and broad
array of established and emerging compliance and data security
vendors in a highly fragmented and competitive environment.
Our principal competitors vary across our suite of data security
solutions and between our enterprise and small- and medium-sized
business customers. We principally compete with hundreds of
smaller, private companies and, to a lesser extent, a more
limited number of larger, more established companies. We believe
only a few of our competitors have an automated compliance
management offering like our TrustKeeper solution or otherwise
possess the breadth of compliance enablement solutions that we
can offer our customers. A few of our larger competitors that do
have a broad array of compliance enablement solutions and other
security software products may be able to offer products or
functionality similar to ours at a more attractive price by
integrating or bundling them more effectively than we can.
We believe our recent revenue growth is attributable to our
success in competing against both small and large companies. If
our target market continues to grow, small, highly specialized
competitors may continue to emerge, and large software vendors
may continue to integrate or bundle their array of security and
compliance products with their other product offerings.
Mergers, acquisitions or consolidations by and among actual and
potential competitors present heightened competitive challenges
to our business. The consolidation in our industry increases the
likelihood of competition based on integration or bundling,
particularly where competitors products and offerings are
effectively integrated, and we believe that consolidation in our
industry may increase the competitive pressures we face on all
our products. If we are unable to sufficiently differentiate our
products from the integrated or bundled products of our
competitors, such as by offering enhanced functionality,
performance or value, we may see a decrease in demand for those
products, which would adversely affect our business, operating
results and financial condition. Further, it is possible that
continued industry consolidation may impact customers
perceptions of the viability of smaller or even medium-sized
firms and consequently customers willingness to purchase
from such firms. Similarly, if customers seek to concentrate
their software purchases in the product portfolios of a few
large providers, we may be at a competitive disadvantage
notwithstanding the superior performance that we believe our
products can deliver.
Another source of competition is represented by the custom
efforts undertaken by potential customers to analyze and manage
the information produced from their existing devices and
applications to identify and remediate threats and satisfy
compliance requirements. In addition, some organizations have
outsourced these functions to managed security services
providers.
We believe we face potential competition from other sources,
including our network partners, that could become effective
competitors. The introduction of alternative technologies and
integration of security and compliance functionality into
existing solutions like payment processing infrastructures and
similar core processing platforms in other industries could
decrease the demand for our products and services.
102
We believe the principal competitive factors in our markets
include the following:
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breadth of product offering;
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price of products and total cost of ownership;
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ease of use;
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distribution capabilities, including relationships with partner
network members;
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security effectiveness;
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delivery method and speed and ease of implementation;
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brand and reputation;
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scalability;
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customer service and support;
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professional services capabilities; and
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financial resources.
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While many of our competitors enjoy certain competitive
advantages over us, such as greater brand recognition, wider
geographic presence and greater financial, technical and other
resources, we believe that our large subscriber base, efficient
customer acquisition model and broad suite of cost effective
data security compliance solutions enable us to compete
favorably with respect to these factors.
Intellectual
Property
Our intellectual property rights are important to our business.
We rely on a combination of patent, trademark, copyright and
trade secret laws in the United States and other intellectual
property laws, confidentiality agreements and license agreements
to protect our intellectual property. It is our policy that our
employees and independent contractors involved in development
are required to sign agreements acknowledging that all
inventions, trade secrets, works of authorship, developments,
concepts, improvements and other processes generated by them on
our behalf are our property, and assigning to us any ownership
that they may claim in those works.
Despite our efforts, the steps we have taken to protect our
proprietary rights may not be adequate to preclude
misappropriation of our proprietary information or infringement
of our intellectual property rights, and our ability to police
such misappropriation or infringement is uncertain, particularly
in countries outside of the United States. United States patent
filings are intended to provide the holder with a right to
exclude others from making, using, selling or importing in the
United States the inventions covered by the claims of granted
patents. Our granted United States patents, and to the
extent any future patents are issued, any such future patents
may be contested, circumvented or invalidated in the future.
Moreover, the rights granted under any issued patents may not
provide us with proprietary protection or competitive
advantages, and we may not be able to prevent third parties from
infringing these patents. Therefore, the exact effect of our
patents and the other steps we have taken to protect our
intellectual property cannot be predicted with certainty.
As of March 31, 2011, we had 18 issued patents and
28 patent applications pending in the United States. We do
not know whether any of our patent applications will result in
the issuance of a patent or whether the examination process will
require us to narrow our claims, except that some of our patent
applications have received office actions and in some cases we
have modified the claims. Although we actively attempt to
utilize patents to protect our technologies, we believe none of
our patents, individually or in the aggregate, are material to
our business. We will continue to file and prosecute patent
applications when appropriate to attempt to protect our rights
in our proprietary technologies.
Our industry is characterized by the existence of a large number
of patents and frequent claims and related litigation regarding
patent and other intellectual property rights. In particular,
leading companies in the software industry have extensive patent
portfolios. From time to time, third parties, including certain
of these leading companies, may assert patent, copyright,
trademark or other intellectual property claims against us, our
partners or our customers. Successful claims of infringement by
a third party could prevent us from distributing certain
products or performing certain services or require us to pay
substantial damages (including treble damages if we are found to
have willfully infringed patents or copyrights), royalties or
other fees. Even if third parties may offer a license to their
technology, the terms of any offered license may not be
acceptable and the failure to obtain a license or the costs
associated with any license could cause our business, operating
results or financial condition to be materially and adversely
affected.
103
We also rely on several registered and unregistered trademarks
to protect our brand. We have registered the
Trustwave®,
TrustKeeper®,
SpiderLabs®,
ModSecurity®,
TrustedApp®,
TrustedSentry®,
Smart
Tag®,
Trusted
Commerce®
Trustwave Security Data
Warehousetm
and
WebDefend®
trademarks in the U.S. in certain classes of goods and
services applicable to our business. Third parties may use
trademarks similar to our trademarks in other fields of use.
Employees
As of March 31, 2011, we had approximately
590 employees, of which approximately 440 were located in
the United States, 40 were located in each of the United Kingdom
and Canada and the remainder were located in various other
locations globally, including Australia, Austria, Brazil, Chile,
China, Colombia, France, Germany, India, Israel, Mexico, Russia,
South Africa, Sweden and Ukraine. We consider our relationship
with our employees to be good. None of our employees is
represented by a labor union or covered by a collective
bargaining agreement.
Facilities
Our worldwide corporate headquarters and executive offices are
located in Chicago, Illinois, where we lease approximately
56,000 square feet of office space under a lease that
expires on October 31, 2019. The lease for approximately
5,200 square feet of this office space expires on
July 31, 2011, the lease for approximately 7,500 square
feet commences on September 1, 2011 and the lease for
approximately 7,400 square feet commences on December 1,
2011. In addition to serving as our corporate headquarters, our
Chicago office also supports our sales and development
operations, as well as a 24x7 customer support and operations
center. The table below lists information about our other
principal operating and support facilities, all of which we
occupy under leases.
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Approximate Square
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Location
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Footage
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Lease Expiration Date
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Austin, Texas
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9,400
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July 31, 2011
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Cambridge, Canada
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9,200
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April 30, 2015
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Greenwood Village, Colorado
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14,700
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August 31, 2021*
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Herzliya, Israel
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6,850
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December 31, 2011
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London, England
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4,150
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March 2021
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Pittsburgh, Pennsylvania
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7,800
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September 30, 2011
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Reston, Virginia
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8,700
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August 31, 2015**
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Sao Paulo, Brazil
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2,260
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September 15, 2013
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Waltham, Massachusetts
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8,400
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March 31, 2016
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*
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The lease for 7,840 square feet of
this total square footage commences September 1, 2011.
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**
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The lease for a portion of the
space (approximately 2,900 square feet) expires
August 31, 2011 and the lease for the remaining space
(approximately 5,800 square feet) expires in September 2015.
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Our leases have been pledged as collateral under our loan
agreement. See Description of Certain Indebtedness.
We believe that our existing facilities are adequate for our
current needs and that suitable additional or alternative space
will be available on commercially reasonable terms if and when
it becomes needed.
Legal
Proceedings
We are occasionally involved in claims and litigation matters in
the ordinary course of business. These claims may include
assertions that our products infringe existing patents or other
intellectual property rights of third parties. We intend to
defend vigorously any such litigation that may arise under all
defenses that would be available to us. At this time, there are
no proceedings of which management is aware that will have a
material adverse effect on the consolidated financial position
or results of operations.
On September 7, 2010, WordCheck Tech, LLC, or
WordCheck, filed a complaint against us and more
than 60 other entities in the United States District Court for
the Eastern District of Texas alleging infringement of its word
checking technology. The complaint seeks a judgment in favor of
WordCheck that the defendants have infringed WordChecks
patent. We filed an answer and counterclaim on November 18,
2010. Because this lawsuit is still in its early stages, and
based upon information currently available to us, the amount of
liability, if any, cannot be reasonably estimated. We intend to
vigorously defend ourselves in this litigation.
104
MANAGEMENT
Below is a list of the names and ages, as of May 31, 2011,
of our executive officers, certain key employees and directors
and a brief summary of their business experience.
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Name
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Age
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Position
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Robert J. McCullen
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47
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Chairman of the Board of Directors, Chief Executive Officer and
President
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Andrew Bokor
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43
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Executive Vice President, Global Services
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Justin C. Choi
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45
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Executive Vice President, General Counsel and Secretary
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Mark Iserloth.
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47
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Chief Financial Officer
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Douglas Klotnia
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42
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Executive Vice President, Payment Services and Channel Sales
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James Kunkel
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45
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Executive Vice President, Corporate Development and
Emerging Technology
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J. Lawrence Podmolik
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47
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Chief Technology Officer
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Michael J. Bartlett
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48
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Senior Vice President, Global Sales
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Kevin Bradford
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55
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Director
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Richard Garman
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54
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Director
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Stuart C. Harvey Jr.
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49
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Director
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Richard Kiphart
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69
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Director
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Timothy Nicholson
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63
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Director
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Joseph Patanella
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49
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Director
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Howard Smith
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41
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Director
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Executive
Officers
Robert J. McCullen has served as our Chief
Executive Officer since March 2005 and as our Chairman of the
Board, Chief Executive Officer and President since May 2007.
Mr. McCullen was a co-founder and one of the two Managing
Partners of Ambiron, which merged with Trustwave in March 2005.
Prior to co-founding Ambiron in 2002, Mr. McCullen was a
Senior Director at VeriSign, Inc., a provider of global digital
trust services, where he was responsible for product management,
product marketing and strategy for the division. Immediately
prior to VeriSign, Mr. McCullen was a founding Partner of
Exault, a data security services firm, managing the
companys marketing, strategy and Western region operations
before its subsequent acquisition by VeriSign in August 2001.
Mr. McCullen brings significant senior leadership,
operational and technical experience to our board of directors.
He has extensive knowledge of the data security compliance
industry, including its historical development, and important
relationships with our partner network members and customers.
Mr. McCullen has been an important contributor to the
expansion of our business through both organic growth and
acquisitions, and as CEO, Mr. McCullen has direct
responsibility for our strategy and operations.
Andrew Bokor has served as our Executive Vice
President, Global Services since May 2011 and as our Executive
Director, EMEA & APAC from January 2010 to May 2011
and as a director since May 2005. Mr. Bokor previously
served as our Chief Operating Officer since May 2005.
Mr. Bokor was a co-founder and one of the Managing Partners
of Ambiron. Prior to co-founding Ambiron, Mr. Bokor was the
Director of Consulting for North America for VeriSign, Inc., a
provider of Internet infrastructure services, since August 2001.
Mr. Bokor has more than 15 years of technical and
management experience in the data security compliance industry,
including his role in co-founding Ambiron. In addition,
Mr. Bokor has been an important contributor to the
expansion of our business through both organic growth and
acquisitions.
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Justin C. Choi has served as our Executive Vice
President, General Counsel and Secretary since January 2011.
Prior to joining Trustwave, Mr. Choi was a private legal
consultant from January 2008 to December 2010, and previously
served as Senior Vice President, General Counsel and Secretary
of Andrew Corporation, a supplier of communications systems and
services, from March 2006 to December 2007, and Vice President,
Law, Corporate and Securities of Avaya, a business
communications company, from September 2000 to February 2006.
Mark Iserloth has served as our Chief Financial
Officer since April 2008. Previously, Mr. Iserloth served
as the Chief Financial Officer of Initiate Systems, a data
management software company, since October 2000. Prior to
joining Initiate Systems, Mr. Iserloth served in a number
of executive finance positions with GD Searle, a pharmaceutical
company, and its parent, the Monsanto Company, including as head
of Financial Planning and Analysis from March 1998 through
September 1999 and acting Chief Financial Officer of GD Searle
from March 2000 through October 2000.
Key
Employees
Douglas Klotnia has served as our Executive Vice
President, Payment Services and Channel Sales since January
2009. Previously, Mr. Klotnia led our Global Sales since
January 2004. Prior to joining Trustwave, Mr. Klotnia
served as Director Strategic Alliances for Internet Security
Systems, a data security company, from January 2001 to November
2003.
James Kunkel has served as our Executive Vice
President, Corporate Development and Emerging Technology
since June 2004. Prior to joining Trustwave, Mr. Kunkel served
in strategic management roles at several payment card processing
companies including Electronic Payment Services, Inc. (now part
of First Data Corporation) and most recently at VITAL Processing
Services (now part of TSYS Merchant Services), where he served
as Vice President of Business Development from August 2001 to
June 2004.
J. Lawrence Podmolik has served as our Chief
Technology Officer since June 2007. Prior to joining Trustwave,
Mr. Podmolik served as the President and Chief Technology
Officer of Redpoint Technologies, a technology consulting
company, since December 1999 and the Chief Technology Officer of
nVisia, an IT consulting firm, from September 1995 to November
1999. Previously, Mr. Podmolik was with Anderson Consulting
(now Accenture), where he led the firms advanced
architecture group.
Michael J. Bartlett has served as our Senior Vice
President, Global Sales since May 2011 and served as our Senior
Vice President, North American Sales from January 2011. Prior to
joining Trustwave, Mr. Bartlett served as the Vice
President of Worldwide Sales for the Cascade Business Unit of
Riverbed Technology, a WAN optimization company, from August
2008 to December 2010. Previously, Mr. Bartlett served
as the Vice President of Sales HP Software at Mercury
Interactive (a business unit within HP Software) from January
2001 to August 2008.
Directors
We believe our board of directors should be comprised of
individuals with sophistication and experience in many
substantive areas that impact our business. We believe
experience, qualifications or skills in the following areas are
most important: software development; sales and marketing;
accounting, finance and capital structure; strategic planning
and leadership of complex organizations; legal, regulatory and
government affairs; people management; and board practices of
other entities. We believe that all of our current board members
possess the professional and personal qualifications necessary
for board service and have highlighted particularly noteworthy
attributes for each board member in the individual biographies
below, or above in the case of Messrs. McCullen and Bokor.
Prior to the completion of this offering, we expect that certain
of the directors named below will resign from our board and new
directors will be appointed to replace such directors. We intend
to add at least one director who will qualify as an audit
committee financial expert as such term is defined in
Item 401(h) of
Regulation S-K.
The timing of such changes to our board of directors are still
being finalized but in any event will be made in order to comply
with applicable rules and regulations of the stock exchange on
which are our common stock will be listed upon completion of
this offering.
106
Kevin Bradford has been a director of the Company
since April 2004. Mr. Bradford served as our Chief
Executive Officer from April 2004 to March 2005 and as Chairman
of our board of directors from April 2004 to May 2007.
Mr. Bradford has served as a Senior Advisor to FTV Capital
since April 2005. Mr. Bradford has served as the Managing
Partner for NWM Restaurant Services, LLC since February 2007.
Prior to Trustwave, during his 30 year career in business
services and financial services, Bradford held positions at
companies such as VITAL Processing Services (now part of TSYS
Merchant Solutions), Electronic Payment Services, Inc. (now part
of First Data Corporation), BISYS Group, Inc. (now part of
Citigroup), First Financial Management Corporation (now part of
First Data Corporation), First Data Management Corporation and
Union Bank.
As the former chief executive officer of Trustwave and senior
executive with numerous other companies, Mr. Bradford
brings to our board significant experience in the data security
compliance industry, extensive knowledge of our company and
leadership skills gained through his business and executive
experience. In addition, Mr. Bradford brings to our board a
strong finance and business operations background.
Richard Garman has been a director of the Company
since April 2004. Mr. Garman joined FTV Capital, a private
equity firm, in 1999 and has served as its Managing Partner
since September 2004. Prior to joining FTV Capital,
Mr. Garman served as President and Chief Executive Officer
of Electronic Payment Systems beginning in 1995. Previously,
Mr. Garman was a partner with Montgomery Securities where
he had corporate finance responsibility for the computer
services sector.
Mr. Garman brings to our board extensive experience in
finance, mergers and acquisitions and corporate strategy
development, and deep knowledge of the financial technology and
services industry. In addition, having held senior management
positions with several companies, Mr. Garman brings to the
board practical management and operations experience.
Stuart C. Harvey Jr. has been a director of the
Company since November 2009. Mr. Harvey is President
and Chief Executive Officer of Ceridian Corporation, which
provides human resources, payroll, benefits and payment
solutions to businesses, since August 2010. Prior to joining
Ceridian, Mr. Harvey served as the President and Chief
Executive Officer of Elavon Global Acquiring Solutions, a wholly
owned subsidiary of U.S. Bank, since April 2008. Elavon is a
global provider of integrated payment processing services.
Mr. Harvey also served as President of Nova Information
Systems, Inc. (which later became Elavon Global Acquiring
Solutions) from July 2005 to April 2008 and as Executive Vice
President for International Business Development from April 2003
to July 2005. Mr. Harvey also served on the board of
directors of Elavon.
Having served as the chief executive officer of two companies,
Mr. Harvey brings to our board senior leadership experience
and significant expertise in corporate operations and finances.
Mr. Harvey also has experience leading the international
expansion of a multinational company, including business
development and mergers and acquisitions.
Richard Kiphart has been a director of the Company
since March 2005. Mr. Kiphart has been the head of the
Private Client Advisors group of William Blair &
Company, L.L.C., an investment banking firm, since March 2009.
He joined William Blair & Company, L.L.C. in 1965,
became a Partner of the firm in 1973 and was in the Corporate
Finance Department from 1980 to March 2009. Mr. Kiphart
currently serves as Chairman of the board of directors of Lime
Energy, a public company, and Ranir LLC, a private company, and
previously served on the boards of First Data Corp. and Concord
EFS, Inc. and as Chairman of the board of directors of Nature
Vision, Inc. (now Swordfish Financial, Inc.). In addition,
Mr. Kiphart currently serves as the President and Chief
Executive Officer of Lyric Opera of Chicago.
Mr. Kiphart brings to the board vast experience in
investment banking, finance and management of complex
organizations as well as experience as a director of payment
services companies. Mr. Kiphart also has extensive
experience serving on the boards of numerous public and private
companies and charitable organizations.
Timothy Nicholson has been a director of the
Company since August 2005. Mr. Nicholson has served as the
Chief Executive Officer of Lyric Healthcare, LLC, a provider of
long term nursing care, special hospital and assisted living
care, which he founded, since April 1998.
107
Mr. Nicholson brings to the board senior management and
human resources experience, specifically related to healthcare
and start-up
businesses, and particular knowledge of strategic planning.
Joseph Patanella has been a director of the
Company since November 1995. Mr. Patanella founded
Trustwave in 1995 and served as our President and Chief
Executive Officer until April 2004. He became the President of
Trustwave in March 2005 when we merged with Ambiron. Prior to
founding Trustwave, Mr. Patanella spent over 18 years
with the National Security Agency and during his last government
assignments served as the National Security Agencys
Technology Liaison to the U.S. Congress and as its
representative to the Senate Intelligence Committees
Technical Advisory Group.
Mr. Patanella brings to the board a keen understanding of
information assurance, data security and regulatory compliance,
as well as significant leadership and operational experience as
a senior executive. Mr. Patanella has also been a key
contributor to the development and expansion of our business.
Howard Smith has been a director of the Company
since December 2006. Since 2006, Mr. Smith has served as a
Managing Director coordinating investment and research in the IT
sector at First Analysis Corporation, a private equity and
venture capital firm. Mr. Smith joined First Analysis in
January 1994. Prior to joining First Analysis Corporation,
Mr. Smith was a senior tax consultant with Arthur
Andersen & Co. since September 1991.
Mr. Smith brings to the board deep knowledge of our
industry and experience with financing. In addition,
Mr. Smith has provided strategic advice to numerous
technology companies in capital raising and buy- and sell- side
merger and acquisition transactions.
Family
Relationships
There are no family relationships between any of our executive
officers or directors.
Corporate
Governance
Board
Composition
Substantially all of our directors have been nominated and
elected to our board of directors pursuant to board rights
granted to certain of our stockholders in the Stockholders
Agreement. For additional information, see Certain
Relationships and Related Party Transactions-Stockholders
Agreement. The Stockholders Agreement will terminate in
accordance with its terms upon the completion of this offering.
Our amended and restated certificate of incorporation that will
be in effect upon completion of this offering will eliminate our
existing classes of preferred stock and common stock, and as a
result, subject to any future issuances of preferred stock,
holders of our common stock will be entitled to one vote for
each share of common stock held by them in the election of our
directors. Our amended and restated certificate of incorporation
will provide that our board of directors shall consist of such
number of directors as determined from time to time by
resolution adopted by a majority of the total number of
directors then in office. Any additional directorships resulting
from an increase in the number of directors may only be filled
by the directors then in office. The term of office for each
director will be until the earlier of his or her death,
resignation or removal. Stockholders will elect directors each
year at our annual meeting. Upon completion of this offering,
our board of directors will consist
of
members.
Our amended and restated certificate of incorporation will
provide that our board of directors will be divided into three
classes, with each director serving a three-year term, and one
class of directors being elected at each years annual
meeting of stockholders. Any change in the number of
directorships resulting from an increase or decrease in the
number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of
one-third of the total number of directors. Prior to the
completion of this offering, we will determine the composition
of these three classes of directors.
We believe that all of our existing directors, other than
Messrs. McCullen, Bokor and Harvey, will be
independent directors as defined under the rules of
our stock exchange upon completion of this offering. In
addition, we believe that
Messrs. will
be independent directors as defined under the rules
of the SEC and our stock exchange for purposes of serving on our
audit committee.
108
Board
Committees
We currently have an Audit Committee and a Compensation
Committee. Prior to the completion of this offering, our board
of directors will establish a new Audit Committee and a new
Compensation Committee which will replace our current
committees, and we will establish a new Nominating and Corporate
Governance Committee. Each of the committees will report to the
board of directors as they deem appropriate and as the board may
request. The expected composition, duties and responsibilities
of these committees are set forth below. In the future, our
board may establish other committees, as it deems appropriate,
to assist it with its responsibilities.
The SEC rules and the rules of our stock exchange on which our
common stock will be listed upon completion of this offering
require us to have one independent member of each of the
committees set forth below upon the listing of our common stock
on such stock exchange and a majority of independent directors
within 90 days of the date of the completion of this
offering. All of the members of these committees must be
independent within one year of the date of the completion of
this offering. We intend to comply with the independence
requirements within the specified time periods.
Audit
Committee
The Audit Committee will be responsible for, among other
matters: (1) appointing, retaining, terminating, and
evaluating our independent registered public accounting firm and
approving all services to be performed by them;
(2) overseeing our independent registered accounting
firms qualifications, independence and performance;
(3) overseeing the financial reporting process and
discussing with management and our independent registered public
accounting firm the interim and annual financial statements that
we file with the SEC; (4) reviewing and monitoring our
accounting principles, accounting policies, financial and
accounting controls and compliance with legal and regulatory
requirements; (5) establishing procedures for the
confidential anonymous submission of concerns regarding
questionable accounting, internal controls or auditing matters;
and (6) reviewing and approving certain related person
transactions.
Upon completion of this offering, our Audit Committee will
consist of
Messrs.
, and
and
will serve as the chairman of such
committee. will
qualify as an independent director according to the rules and
regulations of the SEC
and
and we
believe
will qualify as our audit committee financial
expert, as such term is defined in Item 401(h) of
Regulation S-K.
We expect to add another independent director to our Audit
Committee within 90 days of the effectiveness of the
registration statement of which this prospectus is a part and a
third independent director to our Audit Committee within one
year after the effective date of the registration statement. Our
board of directors will adopt a new written charter for the
Audit Committee, which will be available on our corporate
website at www.trustwave.com upon the completion of this
offering. The information on our website is not part of this
prospectus.
Compensation
Committee
The Compensation Committee will be responsible for, among other
matters: (1) reviewing key employee compensation goals,
policies, plans and programs; (2) reviewing and approving
the compensation of our directors, chief executive officer and
other executive officers; (3) reviewing and approving
employment agreements and other similar arrangements between us
and our executive officers; and (4) administering our stock
plans and other incentive compensation plans.
Upon completion of this offering, our Compensation Committee
will consist of
Messrs. , and
and
will serve as the chairman of such committee. will qualify as an
independent director according to the rules and regulations of
the SEC and our stock exchange. Our board of directors will
adopt a new written charter for the Compensation Committee,
which will be available on our corporate website at
www.trustwave.com upon the completion of this offering. The
information on our website is not part of this prospectus.
109
Nominating
and Corporate Governance Committee
The Nominating and Corporate Governance Committee will be
responsible for, among other matters: (1) identifying
individuals qualified to become members of our board of
directors, consistent with criteria approved by our board of
directors; (2) overseeing the organization of our board of
directors to discharge the boards duties and
responsibilities properly and efficiently; (3) identifying
best practices and recommending corporate governance principles;
and (4) developing and recommending to our board of
directors a set of corporate governance guidelines and
principles applicable to us, (5) reviewing and monitoring
compliance with our code of ethics and our insider trading
policy and (6) reviewing and approving certain related
party transactions.
Upon completion of this offering, our Nominating and Corporate
Governance Committee will consist of
Messrs.
, and
and
will serve as the chairman of such committee. At least one of
those directors will qualify as an independent director
according to the rules and regulations of the SEC and our stock
exchange. Our board of directors will adopt a written charter
for the Nominating and Corporate Governance Committee, which
will be available on our corporate website at www.trustwave.com
upon the completion of this offering. The information on our
website is not part of this prospectus.
Risk
Oversight
The board of directors oversees the risk management activities
designed and implemented by our management. The board of
directors executes its oversight responsibility for risk
management both directly and through its committees. The full
board of directors considers specific risk topics, including
risks associated with our strategic plan, business operations
and capital structure. In addition, the board of directors
receives detailed regular reports from members of our senior
management and other personnel that include assessments and
potential mitigation of the risks and exposures involved with
their respective areas of responsibility.
The board has delegated to the Audit Committee oversight of our
risk management process. Our other board committees also
consider and address risk as they perform their respective
committee responsibilities. All committees report to the full
board as appropriate, including when a matter rises to the level
of a material or enterprise level risk.
Compensation
Committee Interlocks and Insider Participation
None of our executive officers currently serves, or in the past
year has served, as a member of the board of directors or
compensation committee of any entity that has one or more
executive officers serving on our board of directors or
compensation committee.
Code of
Ethics
We will adopt a code of business conduct and ethics applicable
to our principal executive, financial and accounting officers
and all persons performing similar functions. A copy of that
code will be available on our corporate website at
www.trustwave.com upon completion of this offering. We expect
that any amendments to the code, or any waivers of its
requirements, will be disclosed on our website. The information
on our website is not part of this prospectus.
110
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
This Compensation Discussion and Analysis describes the
compensation arrangements we have with our executive officers
listed in the Summary Compensation Table set forth below, which
we refer to as our named executive officers. This
section discusses the objectives and philosophy underlying our
compensation policies for our named executive officers, our
compensation decisions with respect to our named executive
officers during 2010 and the factors relevant to an analysis of
these decisions.
This Compensation Discussion and Analysis contains
forward-looking statements that are based on our current plans
and expectations regarding future compensation plans and
arrangements. The actual compensation plans and arrangements
that we adopt may differ materially from the currently
anticipated plans and arrangements as summarized in this
discussion.
Executive
Compensation Objectives and Philosophy
The key objectives of our executive compensation programs are to
(1) fairly compensate our executive officers,
(2) attract, motivate and retain highly qualified executive
officers who contribute to the long-term success of our company;
(3) achieve accountability for performance; (4) link
future performance rewards to clearly defined corporate goals;
and (5) align the interests of our executive officers and
our stockholders through short- and long-term incentive
compensation programs.
We seek to apply a consistent philosophy to compensation for all
executive officers. Our compensation philosophy is based on the
following core principles:
To Pay
for Performance
Our named executive officers are compensated based on a
combination of company and individual performance factors.
Company performance is evaluated primarily based on the degree
to which pre-established financial objectives are met.
Individual performance is evaluated based upon several
individualized leadership factors, including achieving specific
financial objectives and building and developing individual
skills and a strong leadership team. A significant portion of
total compensation has been delivered in the form of
equity-based award opportunities to directly link compensation
with stockholder value.
To Pay
Competitively
We are committed to providing a total compensation program
designed to retain our highest performing employees and
executives and attract superior leaders to our company. We have
established compensation levels that we believe are competitive
based on our Compensation Committees and our boards
experience with pay practices and compensation levels of
companies similar to us.
To Pay
Equitably
We believe that it is important to apply generally consistent
guidelines for all executive officer compensation programs. In
order to deliver equitable pay levels, our Compensation
Committee considers depth and scope of accountability,
complexity of responsibility, qualifications and executive
performance, both individually and collectively as a team.
In addition to short- and long-term compensation, we have found
it important in some cases to provide certain of our executive
officers with competitive post-employment compensation.
Post-employment compensation consists primarily of severance pay
and benefits continuation for a specified period of time. We
believe that these benefits are important considerations for our
executive officer compensation packages, as they afford a
measure of financial security in the event of certain
terminations of their employment and also enable us to secure
their cooperation following termination. We have sought to
ensure that each combined compensation package is competitive at
the time the package is negotiated with the executive officer.
We provide post-employment
111
compensation to our executive officers on a
case-by-case
basis as the employment market, the qualifications of potential
employees and our hiring needs dictate.
Overview
and Responsibilities for Compensation Decisions
Prior to the completion of this offering, we were a
privately-held company. As a result, we were not subject to any
stock exchange listing or SEC rules requiring a majority of our
board of directors to be independent or relating to the
formation and functioning of board committees, including our
Audit and Compensation Committees. During 2010, our Compensation
Committee consisted of Richard Garman and Richard Kiphart. In
March 2011, Mr. Kiphart was replaced on the Compensation
Committee by Stuart Harvey. Messrs. Garman and Harvey
currently comprise the Compensation Committee.
Prior to the completion of this offering, we will establish a
new Compensation Committee which will replace our existing
Compensation Committee. We expect that our new Compensation
Committee will review our existing compensation programs,
objectives and philosophy and determine whether such programs,
objectives and philosophy are appropriate given that we have
become a public company. We also expect that our new
Compensation Committee will review compensation elements and
amounts for our executive officers on an annual basis and at the
time of a promotion or other change in level of
responsibilities, as well as when competitive circumstances or
business needs may require. In addition, as we gain experience
as a public company, we expect that the specific direction,
emphasis and components of our executive compensation program
will continue to evolve.
We expect that our Compensation Committee will continue to
consider input from our chief executive officer (our Chief
Executive Officer or CEO), our chief financial officer (our
Chief Financial Officer or CFO) and our vice president of human
resources when setting financial objectives for our cash and
non-cash incentive plans. We also expect that these executives
will provide compensation recommendations to the Compensation
Committee for executives other than themselves based on the
benchmarking data discussed below and the other considerations
mentioned in this Compensation Discussion and Analysis. We
anticipate that our Compensation Committee will recommend
compensation packages to our board of directors that is
consistent with our compensation philosophy, strategically
positioned against our peer group and competitive with other
organizations similar to ours.
To date, our Compensation Committee and our CEO, in consultation
with our board of directors, have been responsible for the
oversight, implementation and administration of all of our
executive compensation plans and programs. Our board of
directors and Compensation Committee determined all of the
components of our CEOs compensation, and our board of
directors, Compensation Committee and CEO determined all of the
components of the compensation of our other named executive
officers. Executive compensation is reviewed annually as part of
our business planning for the year. During this process, our CEO
and CFO are involved in the review of overall compensation for
executive officers other than themselves and the determination
of corporate-level performance goals for that year.
Our Compensation Committee and our CEO evaluate the performance
and development of our executive officers in their respective
positions, establish corporate and individual performance
objectives relative to compensation, make determinations as to
whether and to what extent such performance objectives have been
achieved and ensure that we have effective and appropriate
compensation programs in place. Our compensation arrangements
with our executive officers are primarily based on the
consolidated financial achievements of our company along with
personal performance objectives established at the beginning of
the year. We believe in compensating for the overachievement of
corporate or individual objectives and applying incentive
deductions for underachievement of objectives.
Our CEO, as the leader of our executive team, assesses each
named executive officers contribution to corporate goals
and his achievement of individual goals, and then makes a
recommendation to our Compensation Committee with respect to
compensation of certain of our named executive officers. Our
Compensation Committee undertakes a similar review of our
CEOs contribution to corporate goals and achievement of
individual goals. Our Compensation Committee meets, including in
executive sessions, to consider these recommendations and makes
determinations relating to the compensation of our CEO and, in
consultation with our CEO, makes determinations relating to the
compensation of certain of our other named executive officers.
Our CEO has made determinations relating to the compensation of
Mr. Klotnia.
112
We have not historically engaged a third-party consultant to
assist us with determining compensation levels, but our new
Compensation Committee may engage such a consultant in the
future.
Benchmarking
To date, we have not formally benchmarked our executive
compensation against peer companies, nor have we identified a
group of peer companies which would be included in a
benchmarking survey. Compensation amounts historically have been
highly individualized and discretionary, based largely on the
collective experience and judgment of our Compensation Committee
members, along with input from our CEO and other executive
officers, as appropriate. While our Compensation Committee
considers the overall mix of compensation components in its
review of compensation matters, it has not adopted any policies
or guidelines for allocating compensation between long-term and
short-term compensation, between cash and non-cash compensation
or among different forms of non-cash compensation. In addition
to the compensation objectives and philosophy discussed above,
the principal factors affecting our Compensation
Committees decisions regarding amounts and mix of
compensation include:
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overall corporate performance, including financial condition and
available resources;
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the executive officers performance against corporate level
strategic goals established as part of our annual planning
process; and
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the nature and scope of the executive officers
responsibilities.
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Following our initial public offering, we expect that each year
our vice president of human resources, in consultation with our
Compensation Committee, will compile a report of benchmark data
for executive officers holding comparable positions at
comparable companies, including base salary, annual cash
incentive plan opportunities and awards and long-term incentive
award values. We have not determined the peer group of companies
that we will utilize in the benchmarking survey, but we expect
that the peer group will include companies in our industry,
companies with revenues in a range similar to ours and companies
with similar market capitalizations. The compensation paid by
peer group companies to their respective executive officers will
not factor into the determination of the peer group.
While our Compensation Committee will utilize this formal
benchmarking in its consideration of compensation decisions, we
expect that it will continue to manage our compensation programs
on a flexible basis that will allow it to respond to market and
business developments as it views appropriate.
Risk
Management and Assessment
We believe that risks arising from our compensation policies and
practices for our employees are not reasonably likely to have a
material adverse effect on the Company. In addition, our CEO,
Compensation Committee and board of directors believe that the
mix and design of the elements of executive compensation do not
encourage management to assume excessive risks. These beliefs
are based on the following factors:
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we do not have a particular business unit that carries a
significant portion of our overall risk profile on a stand-alone
basis;
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our compensation policies and practices are uniform across each
of our functional areas and departments;
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the mix of compensation among base salary, incentive cash bonus
and long-term incentive awards in the form of stock options,
does not encourage excessive risk taking;
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the equity awards granted to employees under our equity-based
plan generally are subject to multi-year vesting, which requires
an employee to commit to a longer time horizon for such awards
to be valuable; and
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our annual compensation review and performance evaluation
process considers factors that do not encourage excessive risk
taking, such as management skills, team building, integrity and
mentoring.
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113
Employment
Agreements
We are party to an employment agreement with each of our named
executive officers. We have described the material terms of
these agreements in the section -Employment
Agreements. These employment agreements generally
establish the terms and conditions of such named executive
officers employment relationship with us. These agreements
generally provide that such named executive receive a minimum
base salary and bonus opportunity but do not otherwise prescribe
for annual salary or bonus increases or other compensation
increases.
Elements
of Compensation
Compensation for our named executive officers is individualized
and takes into account the financial condition of the company
and general employment conditions in the market. Our current
executive compensation program consists of the following
components:
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base salary;
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annual cash performance-based bonus;
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long term incentive awards in the form of stock options;
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benefits payable upon an executive officers involuntary
termination in certain circumstances; and
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other benefits generally available to all salaried employees.
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Our executive compensation includes both fixed components (base
salary and benefits) and variable components (annual cash bonus
and stock option awards). The fixed components of compensation
are designed to be competitive in order to induce talented
executives to join our company. The variable components are tied
specifically to the achievement of company-wide and individual
objectives and are designed so that above average performance is
rewarded with above average rewards. Our Compensation Committee
believes this mix of compensation components is appropriate for
our named executive officers because it appropriately
incentivizes them to plan and work toward the achievement of our
long-term success and aligns the interests of our named
executive officers with the interests of our stockholders, since
the amount of compensation will vary depending upon our
financial performance. Our Compensation Committee also believes
that this mix is typical of companies in our industry and at our
stage of development. Our Compensation Committee strives to
achieve an appropriate mix between the various elements of our
compensation program to meet our compensation objectives and
philosophy; however, it does not apply any rigid allocation
formula in setting our executive compensation, and we may make
adjustments to this approach for various positions after giving
due consideration to prevailing circumstances, the individuals
involved and their responsibilities and performance.
The table below sets forth for each of our named executive
officers the applicable percentage of his total compensation in
2010 represented by fixed and variable components of his
compensation:
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Percentage of 2010
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Total Compensation
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Name
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Fixed
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Variable
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Robert McCullen
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44
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%
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56
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%
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Mark Iserloth
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72
|
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|
|
28
|
|
Andrew Bokor
|
|
|
67
|
|
|
|
33
|
|
Douglas Klotnia
|
|
|
49
|
|
|
|
51
|
|
David
Parkinson(1)
|
|
|
45
|
|
|
|
55
|
|
|
|
|
(1)
|
|
Mr. Parkinsons
employment with us was terminated on May 20, 2011.
|
Base
Salary
We provide a base salary to our each of our named executive
officers which is intended to reflect the scope of their
responsibilities, individual performance, labor market
conditions and competitive market salary levels. The base
salaries for our named executive officers in 2010 were
established by our board of directors, in consultation
114
with our Compensation Committee, based in large part on the
salaries established for these persons when they were hired or
promoted. Base salaries are reviewed annually and may be
adjusted from time to time based on performance, changes in
responsibilities and overall budget considerations.
In setting base salaries for 2010, our board and Compensation
Committee considered the factors described above in the context
of each named executive officers employment situation and
the particular considerations discussed below. The table below
sets forth the base salaries that became effective on
February 1, 2010 for our named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
Percentage Increase
|
Name
|
|
Annual Salary
|
|
Compared to 2009
|
|
Robert McCullen
|
|
$
|
330,000
|
|
|
|
5.0
|
%
|
Mark Iserloth
|
|
|
260,000
|
|
|
|
4.0
|
|
Andrew Bokor
|
|
|
330,000
|
|
|
|
5.0
|
|
Douglas Klotnia
|
|
|
200,000
|
|
|
|
8.0
|
|
David Parkinson
|
|
|
200,000
|
|
|
|
|
|
The base salary of our CEO for 2010 was increased in recognition
of his performance as the chief executive officer in leading the
overall growth of the company and our continued success in
achieving our business plan. Mr. Bokors base salary
was increased in 2010 due primarily to his new role and expanded
responsibilities as Executive Director for our EMEA and APAC
operating segments. The base salary increase for
Mr. Iserloth was due primarily to his success at building
our global financial and human resources infrastructure to
support our growth domestically and internationally.
Mr. Klotnias base salary was increased due to his
additional responsibilities as head of Product Management and to
recognize his successes with our partner network programs as we
continued to experience success in enrolling partners and
subscribers in our compliance management programs.
Mr. Parkinsons base salary was not adjusted in 2010
because he joined our company in August 2009.
The Compensation Committee authorized an increase, effective
April 1, 2011, in the named executive officers base
salaries to the following amounts: Mr. McCullen
$500,000; Mr. Iserloth $275,000; and
Mr. Bokor $350,000. In addition, our CEO
authorized an increase, effective April 1, 2011, in
Mr. Klotnias base salary to $220,000. The base salary
of our CEO was increased to compensate him for his anticipated
responsibilities as the chief executive officer of a public
company.
In the future, we expect that salaries for our named executive
officers will be reviewed annually, as well as at the time of a
promotion or other change in level of responsibilities, or when
competitive circumstances or business needs may require. As
noted above, we expect that the Compensation Committee will
recommend a compensation package that is consistent with our
compensation philosophy.
Performance-based
Cash Incentives
We pay annual performance-based cash incentives or bonuses in
order to align the compensation of our named executive officers
with our short-term operational and performance goals and to
provide incentives for our named executive officers to meet
those goals. During 2010, Messrs. McCullen, Iserloth and
Bokor participated in our management bonus plan, while
Mr. Parkinson participated in our sales bonus plan.
Mr. Klotnia was awarded a bonus outside of these two bonus
plans.
The management bonus plan contemplated that bonuses would be
paid based on the successful achievement of company-wide and
individual objectives. The objectives were a combination of
quantitative and qualitative metrics and did not include
threshold or maximum targets. At the
beginning of 2010, our management developed an operating budget
that included a number of financial and operating targets that
we expected to achieve during the course of the year. This
budget was submitted to and approved by our board of directors.
The operating budget was updated during the first six months of
the year to account for the three acquisitions during that
period. The quantitative and qualitative objectives for the
management bonus plan were established by our CEO based on the
operating budget and other financial and operating targets
approved by our board of directors. The quantitative
115
objectives were set in June 2010 following the three
acquisitions that were completed during the year. The principal
company-wide objectives for the management bonus plan were:
|
|
|
|
|
achieve a total revenue goal of $105.3 million for the year;
|
|
|
|
|
|
timely achievement of milestones with respect to our product
road map, including product updates, new
functionality, and new releases over the course of the year;
|
|
|
|
|
|
overall geographic expansion in the markets where we have a
presence; and
|
|
|
|
|
|
infrastructure build-out in order to support our continued and
expected growth and the potential of becoming a public company,
including review of and, as appropriate, changes in or upgrades
to our systems that support sales, human resources and finance
functions; the addition of personnel in finance, human
resources, IT and legal; and a review of our corporate structure.
|
With respect to individual objectives under the management bonus
plan, our CEO had a significant amount of discretion in setting
performance goals and determining whether those goals had been
achieved. The individual performance goals for our CEO were
established by our Compensation Committee, which also determined
whether those goals were achieved. Performance goals were based
principally on the named executive officers management
function and related to the corporate targets approved by our
board. The following summarizes the 2010 performance goals for
Messrs. McCullen, Iserloth and Bokor:
Robert McCullen President and Chief Executive
Officer:
|
|
|
|
|
develop and implement policies that will encourage achievement
of revenue growth goals;
|
|
|
|
|
|
manage key business partner relationships so that the company is
well positioned for the future;
|
|
|
|
maintain a strong portfolio of pipeline products;
|
|
|
|
continue the development of the leadership team to ensure the
long-term success of the company; and
|
|
|
|
ensure the appropriate infrastructure and reporting is in place
to support a growing company.
|
Mark Iserloth Chief Financial Officer:
|
|
|
|
|
play an integral role in the forecasting and business
development processes and modeling activities necessary to
evaluate and negotiate new projects to ensure that new projects
provide returns in line with corporate goals;
|
|
|
|
maintain expense and capital spending in line with budgets and
forecasts;
|
|
|
|
communicate appropriate performance metrics to enable
measurement and adjustment of the companys strategic
direction; and
|
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|
|
continue to build out the corporate and financial reporting
infrastructure to support a public company.
|
Andrew Bokor Executive Director, EMEA and
APAC:
|
|
|
|
|
assume leadership over our EMEA/APAC operations;
|
|
|
|
standardize our delivery methodology; and
|
|
|
|
deliver on financial goals.
|
The sales bonus plan, on the other hand, focused primarily on
the achievement of specific sales targets. As with the
management bonus plan, our CEO had a significant amount of
discretion in setting performance goals for Mr. Parkinson
and determining whether those goals had been achieved.
Mr. Parkinsons sales targets for 2010 were separated
into two product categories. For certain specified products,
Mr. Parkinson had a sales target of $75.0 million in
North America and LAC. For certain other products,
Mr. Parkinson had a
sub-target
of $8.5 million of sales in North America and LAC.
116
Mr. Klotnia did not participate in either the management
bonus plan or the sales plan. Our CEO had sole discretion to
determine his performance goals and whether those goals were met
during the year. The following summarizes the 2010 performance
goals for Mr. Klotnia:
|
|
|
|
|
strengthen our partner network by adding new partners;
|
|
|
|
|
|
increase the rate of conversion of enrollees to subscribers;
|
|
|
|
|
|
provide leadership to the product management team;
|
|
|
|
|
|
build-out infrastructure to support network partners and small-
and medium-sized business customers; and
|
|
|
|
improve and expedite the road map of our product development
activities.
|
On March 4, 2011, our board of directors determined, based
upon the recommendation of our CEO, that the corporate
objectives under the management bonus plan had been achieved and
approved bonus payments under the management bonus plan and
sales bonus plan, subject to our CEO determining that individual
performance goals for each of the participants (other than
himself) under the management bonus plan and sales bonus plan
had been satisfied.
Our CEO considered the following factors in making the
recommendation to our board of directors that the company-wide
objectives under the management bonus plan were achieved:
|
|
|
|
|
we achieved total revenue of $111.5 million for 2010, which
exceeded the revenue target by 5.7% and represented revenue
growth of 52.5% as compared to 2009;
|
|
|
|
|
|
we successfully identified, acquired and began the integration
of three companies in the first half of 2010, which together
added significantly to our portfolio of compliance enablement
technologies;
|
|
|
|
TrustKeeper continued to experience success at supporting our
growing subscriber base;
|
|
|
|
we continued to expand our compliance enablement offerings and
capabilities, including introducing our
end-to-end
encryption solution, PenTest Manager, and Windows 7 support for
our DataControl solution;
|
|
|
|
we achieved sales growth of 36% in EMEA as compared to
2009; and
|
|
|
|
we implemented a new sales tracking and reporting system,
upgraded internal reporting capabilities and opened a new
disaster recovery facility.
|
Following our board of directors approving the bonus payments,
our CEO concluded that each of our named executive officers had
satisfied his individual performance goals set forth above, and
our board of directors determined that our CEO had satisfied his
individual performance goals.
The size of the potential bonus payment for each named executive
officer as a percentage of his base salary was determined at the
time he was hired by us. The percentage was based primarily on
general compensation practices in our industry with respect to
similarly situated employees, but may have changed since the
officers hiring as a result of changes in responsibility,
tenure or achievement. The following table shows each named
executive officers
117
potential bonus payment as a percentage of 2010 base salary and
his actual bonus payment in absolute terms and as a percentage
of 2010 base salary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Bonus Payment as a
|
|
Actual Bonus Payment
|
|
|
|
|
Percentage of Base
|
|
as a Percentage of
|
|
Actual Bonus
|
Name
|
|
Salary(1)
|
|
Base Salary
|
|
Payment
|
|
Robert McCullen
|
|
|
50
|
%
|
|
|
133
|
%
|
|
$
|
440,000
|
|
Mark Iserloth
|
|
|
30
|
|
|
|
43
|
|
|
|
110,500
|
|
Andrew Bokor
|
|
|
50
|
|
|
|
71
|
|
|
|
233,750
|
|
Douglas Klotnia
|
|
|
100
|
|
|
|
113
|
|
|
|
225,000
|
|
David Parkinson
|
|
|
100
|
|
|
|
137
|
|
|
|
274,844
|
|
|
|
|
(1)
|
|
For Messrs. McCullen, Iserloth
and Bokor, each of the applicable percentages was determined
based on the terms of the named executive officers
employment agreement. For Messrs. Klotnia and Parkinson,
each of the applicable percentages was determined by our CEO in
accordance with the terms of the named executive officers
employment agreement. See Employment
Agreements.
|
The size of the bonuses awarded to our named executive officers
reflected the determination by our CEO and board of directors
that the quantitative and qualitative performance goals under
the management bonus plan and sales bonus plan established at
the beginning of the year had been significantly exceeded. In
particular, the bonus awards recognized our consistent quarter
over quarter revenue growth during 2010 and significant overall
revenue growth compared to 2009. Our CEO, Compensation Committee
and board of directors also determined that the high achievement
of individual objectives by our named executive officers
warranted bonuses that were greater than the targeted level. In
particular:
|
|
|
|
|
Mr. McCullen successfully developed a strong executive
leadership team to prepare the company for an initial public
offering;
|
|
|
|
Mr. Iserloth maintained expense and capital spending in
line with budgets and forecasts despite significant revenue
growth and three acquisitions during the course of the year, and
led the build out of our internal reporting capabilities in
preparation for an initial public offering;
|
|
|
|
Mr. Bokor relocated to London at our request to provide
leadership to our growing business in EMEA and APAC;
|
|
|
|
Mr. Klotnia achieved sales to network partners that
exceeded the target, and led the effort that resulted in a
significant increase in our enrolled and subscriber
base; and
|
|
|
|
|
|
Mr. Parkinson achieved total sales in North America and LAC
of $68.4 million, or 91% of the target, and sales of
$15.4 million with respect to the sub-target products, or
more than 182% of the sub-target.
|
In determining the specific bonus amount to be awarded to each
named executive officer, our Compensation Committee and CEO did
not apply a formula or other uniform standard across all of our
named executive officers. Rather, our Compensation Committee and
CEO had broad discretion in making individual bonus
determinations. Mr. McCullen received the most significant
bonus as a percentage of his base salary due to his overall
leadership of our company, including enacting the corporate
policies and strategies in 2010 and prior years that led to our
substantial growth. Each of Messrs. Iserloth, Bokor and
Klotnia received a bonus award in an amount that reflected our
Compensation Committees and our CEOs determination
of his overall leadership responsibilities, his contributions to
the achievement of our operational and strategic goals and the
extent to which his individual goals were achieved or exceeded.
Mr. Parkinsons bonus award was determined based upon
substantial achievement of his target and sales that were
significantly in excess of his
sub-target.
Long-Term
Equity Incentives
To date, our long-term incentive awards have primarily been in
the form of stock options granted under the Trustwave Holdings,
Inc. 2001 Stock Incentive Plan as amended from time to time, the
2001 Stock Incentive Plan. We have used grants of
stock options as our principal form of equity incentive because
we believe stock options are an effective means to align the
long-term interests of our executive officers with those of our
stockholders. The
118
options attempt to achieve this alignment by providing our
executive officers with equity incentives that vest over time or
upon the occurrence of certain events. The value of an option is
at risk for the named executive officer and is entirely
dependent on the value of a share of our stock. The value of our
stock is dependent in many ways on managements success in
achieving our goals. If the price of our common stock drops, for
any reason, over the vesting period of the option, the value of
the option to the executive will drop and could become
worthless. We did not make any grants of stock options to our
named executive officers in 2010. On March 4, 2011, the
board of directors approved an option grant to Mr. Iserloth
(option to purchase 100,000 shares) and Mr. Klotnia
(option to purchase 170,000 shares) under the 2001 Stock
Incentive Plan.
Generally, a stock option award is made in the year that an
executive officer commences employment. The size of each option
award is intended to offer the executive a meaningful
opportunity for stock ownership relative to his or her position
and reflects our Compensation Committees assessment of
market conditions affecting the position as well as the
individuals potential for future responsibility within our
company. After the initial option grant, additional options may
be granted in the discretion of our Compensation Committee or
board of directors. Historically, we have not granted additional
options on an annual basis to executives or other employees,
although we do evaluate individual performance annually.
However, additional options have been granted to executives on a
case-by-case
basis where our Compensation Committee determines that such
grants are appropriate or necessary to reward exceptional
performance (including upon promotions) or to retain individuals
when market conditions change. The size of additional option
grants are determined by our Compensation Committee or our board
of directors and are typically based on the recommendations of
our CEO (except with respect to his own option grants).
Outstanding stock options generally have an exercise price at
least equal to the fair market value of our common stock on the
grant date, generally vest over four years (with 25% of the
option shares vesting after one year of service and the
remainder vesting in equal installments at the end of each
quarter thereafter) and have a ten year term. The stock options
that have been granted to Mr. Iserloth prior to 2011 will
vest upon the completion of this offering. Prior to our initial
public offering, the fair market value of our common stock was
established by use of a third party to contemporaneously value
our common stock using a variety of methods. Following our
initial public offering, the fair market value of our common
stock will be the closing price of our stock on the stock
exchange on which it is listed on the date of the grant. As a
privately owned company prior to the date of our initial public
offering, we had not established a program, plan or practice
pertaining to the timing of stock option grants in relation to
the release of material non-public information. Our Compensation
Committee intends to evaluate our grant practices from time to
time in the future and change them as it deems necessary and
appropriate.
We may in the future grant other forms of equity incentives,
subject to the Compensation Committees discretion, to
ensure that our executives are focused on long-term value
creation. We expect that the Compensation Committee will
periodically review the equity awards previously awarded to
management, the performance of our business and the performance
of our stock. We expect that the Compensation Committee will
establish levels of equity incentive holdings for our named
executive officers such that the portion of overall compensation
that is variable is consistent with our
pay-for-performance
philosophy and competitive within our industry. The Compensation
Committee is expected to determine appropriate levels of equity
awards following the completion of this offering based on these
factors and may make additional grants.
Summary
of 2001 Stock Incentive Plan
The 2001 Stock Incentive Plan allows for the grant of stock
options (both incentive and non-qualified) and stock awards
(both restricted and nonrestricted) each, an award.
The purpose of the 2001 Stock Incentive Plan is to provide
incentives that will attract, retain and motivate high
performing officers, directors, employees and consultants by
providing them with an ownership interest in conjunction with
our long-term success. The following is a summary of the
material terms of the 2001 Stock Incentive Plan, but does not
include all of the provisions of the 2001 Stock Incentive Plan.
For further information about the 2001 Stock Incentive Plan, we
refer you to the complete copy of the 2001 Stock Incentive Plan,
which we have filed as an exhibit to the registration statement,
of which this prospectus is a part. Upon adoption of the 2011
Incentive Plan no further grants will be made under our 2001
Stock Incentive Plan, provided that grants outstanding under the
2001 Stock Incentive Plan will continue to be governed by such
plan.
119
Administration. The 2001 Stock Incentive Plan
is currently administered by our board of directors. Our board
has full authority to administer and interpret the 2001 Stock
Incentive Plan, to grant awards under the 2001 Stock Incentive
Plan, to determine the persons to whom awards will be granted,
to determine the terms and conditions of each award, to
determine the number of shares of common stock to be covered by
each award and to make all other determinations in connection
with the 2001 Stock Incentive Plan and the awards thereunder as
the board deems necessary or desirable.
Available Shares. As of March 31, 2011,
the aggregate number of shares of common stock with respect to
which awards may be granted under the 2001 Stock Incentive Plan
was 27,655,957, which may be either authorized and unissued
shares of our common stock or shares of common stock held in or
acquired for our treasury, of which there were
3,813,343 shares of common stock available for grant. The
number of shares with respect to which awards may be granted
under the 2001 Stock Incentive Plan may be adjusted, in the
discretion of our board of directors, in the event that we
affect a stock dividend or stock split or there occurs any other
event which necessitates such adjustment. In general, if awards
under the 2001 Stock Incentive Plan are for any reason cancelled
or forfeited or expire or terminate unexercised, the shares
covered by such awards will again be available for the grant of
awards under the 2001 Stock Incentive Plan.
Eligibility for Participation. Our directors,
officers, employees and nonemployee consultants are eligible to
receive awards under the 2001 Stock Incentive Plan. The
selection of participants is made by our board of directors.
Grant Agreements. Awards granted under the
2001 Stock Incentive Plan are evidenced by grant agreements,
which need not be identical, that provide additional terms,
conditions, restrictions and limitations covering the grant of
the award, including additional terms providing for the
acceleration of exercisability or vesting of awards in the event
of a change in control or conditions regarding the
participants employment, as determined by our board. Each
stock option granted under the plan may be a nonqualified stock
option or an incentive stock option within the
meaning of the Code.
Our board of directors determines the number of shares of our
common stock subject to each award, the term of each award,
which may not exceed ten years, the exercise price, the vesting
schedule, if any, and the other material terms of each award.
Generally, no stock option may have an exercise price less than
the fair market value of a share of our common stock at the time
of grant. However, in 2002, we granted an aggregated of
2,718,717 stock options to purchase shares of our Class A
common stock at an exercise price of $0.01 per share, which was
less than the fair market value of a share of our Class A
common stock at the time of grant. Stock options will be
exercisable at such time or times and subject to such terms and
conditions as determined by our board at grant and the
exercisability of such options may be accelerated by our board.
Additional
Executive Benefits
We provide our named executive officers with benefits that our
board of directors believes are reasonable and in the best
interests of our company and our stockholders. Consistent with
our compensation philosophy, we intend to continue to maintain
our current benefits for our named executive officers, including
retirement plans, life insurance benefits, paid vacation and
other benefits described below. The Compensation Committee, in
its discretion, may revise, amend or add to an officers
benefits if it deems it advisable. We believe these benefits are
generally equivalent to benefits provided by comparable
companies.
Retirement Plan Benefits. We sponsor a 401(k)
defined-contribution plan, or the 401(k) Plan
covering substantially all eligible employees, including our
named executive officers. Employee contributions to the 401(k)
Plan are voluntary. We contribute an amount equal to 50% of the
first 6% of the eligible compensation contributed by a
participant. Employer contributions vest immediately.
Contributions by participants are limited to their annual tax
deferred contribution limit as allowed by the Internal Revenue
Service. Our total matching contributions to the 401(k) Plan
were $1.0 million for the year ended December 31, 2010.
Health and Welfare Benefits. We offer medical,
dental, vision, life insurance, long-term disability insurance
and accidental death and dismemberment insurance for all
eligible employees. Our named executive officers are eligible to
participate in these benefits on the same basis as all other
employees.
120
Accounting
and Tax Considerations
In determining which elements of compensation are to be paid,
and how they are weighted, we also take into account whether a
particular form of compensation will be deductible under
Section 162(m) of the Code. Section 162(m) generally
limits the deductibility of compensation paid to our named
executive officers to $1 million during any fiscal year
unless such compensation is performance-based under
Section 162(m). However, under a Section 162(m)
transition rule for compensation plans or agreements of
corporations which are privately held and which become publicly
held in an initial public offering, compensation paid under a
plan or agreement that existed prior to the initial public
offering will not be subject to Section 162(m) until the
earlier of (1) the expiration of the plan or agreement;
(2) a material modification of the plan or agreement;
(3) the issuance of all employer stock and other
compensation that has been allocated under the plan; or
(4) the first meeting of stockholders at which directors
are to be elected that occurs after the close of the third
calendar year following the year of the initial public offering,
or the Transition Date. After the Transition Date,
rights or awards granted under the plan, will not qualify as
performance-based compensation for purposes of
Section 162(m) unless such rights or awards are granted or
vest upon pre-established objective performance goals, the
material terms of which are disclosed to and approved by our
stockholders.
Our compensation program is intended to maximize the
deductibility of the compensation paid to our named executive
officers to the extent that we determine it is in our best
interests. Consequently, we may rely on the exemption from
Section 162(m) afforded to us by the transition rule
described above for compensation paid pursuant to our
pre-existing plans.
Many other Code provisions, SEC regulations and accounting rules
affect the payment of executive compensation and are generally
taken into consideration as programs are developed. Our goal is
to create and maintain plans that are efficient, effective and
in full compliance with these requirements.
Compensation
Tables
The following tables provide information regarding the
compensation earned by our named executive officers during the
year ended December 31, 2010.
Summary
Compensation Table
The following table shows the compensation earned by our named
executive officers during the year ended December 31, 2010.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Non-Equity
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
All Other
|
|
|
Name and
|
|
Salary
|
|
Compensation
|
|
Compensation
|
|
Total
|
Principal Position
|
|
($)(1)
|
|
($)
|
|
($)(2)
|
|
($)
|
|
Robert McCullen
|
|
|
328,125
|
|
|
|
440,000
|
|
|
|
13,675
|
|
|
|
781,800
|
|
Chairman, Chief Executive Officer and President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Iserloth
|
|
|
258,750
|
|
|
|
110,500
|
|
|
|
20,913
|
|
|
|
390,163
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew Bokor
|
|
|
328,125
|
|
|
|
233,750
|
|
|
|
154,477
|
(3)
|
|
|
716,352
|
|
Executive Director, EMEA and APAC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Klotnia
|
|
|
197,969
|
|
|
|
225,000
|
|
|
|
20,695
|
|
|
|
443,664
|
|
Executive Vice President, Payment Services and Channel Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Parkinson(4)
|
|
|
200,000
|
|
|
|
274,844
|
|
|
|
21,582
|
|
|
|
496,426
|
|
Executive Vice President, Field Operations, Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The salary amounts listed in the
table for Messrs. McCullen, Iserloth, Bokor and Klotnia differ
from the base salaries listed for such named executive officers
in the section entitled Compensation Discussion and
AnalysisElements of CompensationBase Salary
because those base salaries became effective on February 1,
2010.
|
(2)
|
|
The following table details
All other compensation paid to each of our named
executive officers during the year ended December 31, 2010:
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
life and
|
|
|
|
|
|
401(k)
|
|
|
|
|
health
|
|
disability
|
|
Housing
|
|
Relocation
|
|
company
|
|
|
|
|
benefits
|
|
insurance
|
|
allowance
|
|
benefits
|
|
match
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Robert McCullen
|
|
|
13,535
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,675
|
|
Mark Iserloth
|
|
|
13,535
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
7,238
|
|
|
|
20,913
|
|
Andrew Bokor
|
|
|
11,027
|
|
|
|
428
|
|
|
|
87,928
|
|
|
|
55,094
|
|
|
|
|
|
|
|
154,477
|
|
Douglas Klotnia
|
|
|
13,067
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
7,488
|
|
|
|
20,695
|
|
David Parkinson
|
|
|
13,535
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
7,907
|
|
|
|
21,582
|
|
|
|
|
(3)
|
|
In connection with Mr. Bokor
assuming the position of Executive Director, EMEA and APAC and
relocating to London, we agreed to pay to Mr. Bokor the
difference between his actual income tax liability for 2010 and
his estimated income tax liability assuming he had been located
in the United States during the year. The amount of any such
payment has not yet been determined and, as a result, we have
not included any such payment in the table above.
|
|
|
|
(4)
|
|
Mr. Parkinsons
employment with us was terminated on May 20, 2011.
|
Grants
of Plan-based Awards
During 2010, each of our named executive officers participated
in either our 2010 management bonus plan or our 2010 sales bonus
plan in which each officer was eligible for awards set forth
under Estimated potential payouts under non-equity
incentive plan awards below. The actual payout for the
named executive officers is set forth above under the
Non-equity incentive plan compensation column of the
Summary Compensation Table. For a detailed discussion of our
2010 management bonus plan, refer to
Compensation Discussion and
Analysis Elements of Compensation-Performance-based
Cash Incentives.
We did not make any grants of stock options or restricted stock
to our named executive officers during 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Under Non-Equity Incentive
|
|
|
Plan
Awards(1)
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
Name
|
|
($)
|
|
($)(1)
|
|
($)
|
|
Robert McCullen
|
|
|
|
|
|
|
165,000
|
|
|
|
|
|
Mark Iserloth
|
|
|
|
|
|
|
78,000
|
|
|
|
|
|
Andrew Bokor
|
|
|
|
|
|
|
165,000
|
|
|
|
|
|
Douglas Klotnia
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
David Parkinson
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts set forth under
Target only include the amount payable under the
2010 management bonus plan and 2010 sales bonus plan. There were
no Threshold or Maximum amounts
established for the 2010 management bonus plan or 2010 sales
bonus plan. Mr. Klotnia did not participate in either the
2010 management bonus plan or the 2010 sales bonus plan, and the
amount set forth under Target was the amount payable
as a bonus to Mr. Klotnia outside of these two bonus plans.
|
Outstanding
Equity Awards at Fiscal Year-end
The table below sets forth certain information regarding the
outstanding option awards held by our named executive officers
as of December 31, 2010. All of the option awards were
issued under our 2001 Stock Incentive Plan. For further
information regarding our 2001 Stock Incentive Plan, including
the vesting schedules of the awards granted thereunder, see
Compensation Discussion and
Analysis Equity Incentives. We have not
granted any restricted stock awards to our named executive
officers.
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
Underlying
|
|
|
|
|
|
|
|
|
Underlying
|
|
Unexercised
|
|
|
|
|
|
|
|
|
Unexercised Options
|
|
Options
|
|
Option
|
|
Option
|
|
|
|
|
Exercisable
|
|
Unexercisable
|
|
Exercise Price
|
|
Expiration
|
Name
|
|
Grant Date
|
|
(#)
|
|
(#)
|
|
($)
|
|
Date
|
|
Robert McCullen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
Iserloth(1)
|
|
|
12/9/2009
|
|
|
|
7,500
|
|
|
|
22,500
|
|
|
|
0.79
|
|
|
|
12/8/2019
|
|
|
|
|
5/12/2008
|
|
|
|
312,500
|
|
|
|
187,500
|
|
|
|
0.78
|
|
|
|
4/6/2018
|
|
Andrew Bokor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas
Klotnia(2)
|
|
|
12/9/2009
|
|
|
|
25,000
|
|
|
|
75,000
|
|
|
|
0.79
|
|
|
|
12/8/2019
|
|
|
|
|
3/9/2009
|
|
|
|
65,625
|
|
|
|
84,375
|
|
|
|
0.72
|
|
|
|
3/8/2019
|
|
|
|
|
5/10/2007
|
|
|
|
175,000
|
|
|
|
25,000
|
|
|
|
0.64
|
|
|
|
5/9/2017
|
|
|
|
|
8/9/2006
|
|
|
|
25,000
|
|
|
|
|
|
|
|
0.21
|
|
|
|
8/8/2016
|
|
David
Parkinson(3)
|
|
|
12/9/2009
|
|
|
|
125,000
|
|
|
|
275,000
|
|
|
|
0.79
|
|
|
|
8/25/2019
|
|
|
|
|
(1)
|
|
The options granted to
Mr. Iserloth are subject to vesting as follows:
|
|
|
|
|
|
|
|
Date of Grant
|
|
Number of Shares
|
|
Vesting Schedule
|
|
12/9/2009
|
|
|
30,000
|
|
|
25% on December 8, 2010 and 6.25% on each quarterly
anniversary thereafter
|
5/12/2008
|
|
|
500,000
|
|
|
25% on April 7, 2009 and 6.25% on each quarterly
anniversary thereafter
|
|
|
|
(2)
|
|
The options granted to
Mr. Klotnia vest as follows: 25% on the one year
anniversary of the date of grant and 6.25% on each quarterly
anniversary thereafter.
|
(3)
|
|
The options granted to
Mr. Parkinson vest as follows: 25% on August 26, 2010,
the one year anniversary of the date he began his employment
with us, and 6.25% on each quarterly anniversary thereafter.
|
Option
Exercises and Stock Vested
There were no option awards exercised by any of our named
executive officers during 2010, and none of our named executive
officers hold any other stock awards, including any that vested
during 2010.
Restricted
Stock Unit Exercises and Shares Vested
None of our named executive officers hold any restricted stock
awards or other stock awards, including any that vested during
2010.
Pension
Benefits
We did not sponsor any qualified or nonqualified defined benefit
plans during 2010. Our board of directors or Compensation
Committee may elect to adopt qualified or nonqualified benefit
plans in the future if it determines that doing so is in our
best interest.
Deferred
Compensation
We do not currently provide any deferred compensation program or
benefits but may elect to do so in the future.
Employment
Agreements
We have employment agreements with each of our named executive
officers. All of these employment agreements have similar terms
and conditions as summarized below. Each agreement provides,
among other things:
|
|
|
|
|
that the agreement is effective until either party gives the
other party notice of termination;
|
|
|
|
a compensation package that includes an annual base salary, an
annual or quarterly bonus opportunity with a bonus target being
not less than a specified percentage of the executives
base salary and eligibility to
|
123
|
|
|
|
|
participate in stock option plans, 401(k) plan, group life
insurance, medical coverage and other employee benefit plans
that we have adopted for our employees;
|
|
|
|
|
|
intellectual property assignment and non-disclosure provisions;
|
|
|
|
a non-competition provision that prohibits, during the
executives employment and for one year thereafter (or, in
the case of Mr. Parkinson, six months), the executive from
directly or indirectly owning, managing, operating, controlling
or being employed by any business that directly competes with us
or any of our subsidiaries; and
|
|
|
|
non-solicitation provisions that prohibit, during the
executives employment and for one year thereafter, the
executive from persuading or attempting to persuade any existing
customer or agent with which we have a contract to cease doing
business with or reduce the amount of business that they conduct
with us or any of our subsidiaries or hiring, attempting to
recruit or soliciting for hire any person who has been employed
by us or any of our subsidiaries within the preceding twelve
months.
|
The employment agreements for each of Messrs. McCullen,
Bokor and Iserloth provide for acceleration of all unvested
stock options upon a change of control. In addition,
Mr. Iserloths unvested stock options granted in May
2008 and December 2009 will vest upon completion of this
offering pursuant to the terms of his employment agreement.
Messrs. McCullen and Bokor do not have any outstanding
stock options.
In the event we terminate the executives employment
without cause (as defined below) or the executive
terminates his employment for good reason (as
defined below), then the executive is entitled to:
(i) severance equal to one year of his base salary (or, in
the case of Mr. Parkinson, six months of his base salary);
(ii) a prorated bonus for the year during which the
termination occurs if the performance objectives and criteria
under the company bonus plan are achieved and other senior
executives receive bonuses (other than Mr. Klotnia, whose
bonus is paid quarterly if earned and is not tied to whether
other senior executives receive bonuses); and
(iii) continuation of health insurance benefits for one
year (or, in the case of Mr. Parkinson, six months), in
each case conditioned upon the executive signing a general
release within 45 days after his termination date. The
executive is also entitled to be paid his accrued salary through
his termination date, a cash payment equal to the
executives accrued, unused vacation prorated for the
portion of the year worked and a bonus for the prior year (or,
in the case of Mr. Klotnia, the prior quarter) if the
performance criteria and objectives under the company bonus plan
were achieved, to the extent such bonus has not been paid.
Under the employment agreements, cause means:
(i) the executives willful and intentional disregard
of instructions of the board (or, in the case of
Messrs. Iserloth, Parkinson and Klotnia, our CEO) which, in
the boards or our CEOs, as applicable, reasonable
good faith judgment, has caused or will cause substantial and
material injury to our business; (ii) a material breach by
the executive of his duties under his employment agreement which
is willful, deliberate or grossly negligent or committed in bad
faith; (iii) a conviction of, or plea of guilty
or no contest to, a felony or the commission of any
act or omission involving disloyalty, fraud or moral turpitude
with respect to Trustwave; (iv) a breach of the
confidentiality, non-competition or non-solicitation provisions
of his employment agreement; (v) the executives use
of alcohol or illegal drugs which materially interferes with the
performance of the executives duties under his employment
agreement; or (vi) the executives material, knowing
and intentional failure to comply with applicable laws with
respect to the execution of our business and operations if, in
the boards judgment, such failure has caused or will cause
substantial and material injury to our business.
Under the employment agreements, good reason means:
(i) the executives duties of responsibility have been
materially reduced from the duties or level of responsibility
set forth in his employment agreement; (ii) we require the
executive to relocate his principal place of work more than
25 miles from the Chicago, Illinois metropolitan area (or,
in the case of Mr. Parkinson, 50 miles from the
Boston, Massachusetts metropolitan area); or (iii) any
other material failure by us to comply with material provisions
of the executives employment agreement which continues for
more than 30 days after written notice of such
noncompliance from the executive.
Mr. Parkinsons employment with us was terminated
without cause on May 20, 2011. In connection with his
termination, we entered into a general release with
Mr. Parkinson pursuant to which we agreed to additional
termination payments and benefits for Mr. Parkinson. See
Potential Payments Upon Termination and Change
in Control.
124
Potential
Payments Upon Termination and Change in Control
The table below summarizes the compensation payable to each of
our named executive officers in the event we terminate his
employment with us without cause or the officer resigns for good
reason. The table reflects amounts payable to our named
executive officers assuming his employment terminated on
December 31, 2010. The information assumes that the named
executive officer executed a general release of claims against
us within 45 days of his termination date.
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
Without Cause or
|
|
Death and
|
|
Change in
|
Name
|
|
Benefit
|
|
for Good Reason
|
|
Disability(1)
|
|
Control
|
|
Robert McCullen
|
|
Base salary continuation
|
|
$330,000
|
|
|
|
|
|
|
Bonus(2)
|
|
165,000
|
|
|
|
|
|
|
Continuation of
benefits(3)
|
|
19,304
|
|
|
|
|
|
|
Vesting of
options(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$514,304
|
|
|
|
|
Mark Iserloth
|
|
Base salary continuation
|
|
$260,000
|
|
|
|
|
|
|
Bonus(2)
|
|
78,000
|
|
|
|
|
|
|
Continuation of
benefits(3)
|
|
19,304
|
|
|
|
|
|
|
Vesting of options
|
|
100% of unvested
options
|
|
100% of unvested options
|
|
100% of unvested options
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$357,304
|
|
|
|
|
Andrew Bokor
|
|
Base salary continuation
|
|
$330,000
|
|
|
|
|
|
|
Bonus(2)
|
|
165,000
|
|
|
|
|
|
|
Continuation of
benefits(3)
|
|
18,500
|
|
|
|
|
|
|
Vesting of
options(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$513,500
|
|
|
|
|
Douglas Klotnia
|
|
Base salary continuation
|
|
$200,000
|
|
|
|
|
|
|
Bonus(2)
|
|
100,000
|
|
|
|
|
|
|
Continuation of
benefits(3)
|
|
18,580
|
|
|
|
|
|
|
Vesting of options
|
|
100% of unvested
options
|
|
100% of unvested options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$318,580
|
|
|
|
|
David
Parkinson(5)
|
|
Base salary continuation
|
|
$100,000
|
|
|
|
|
|
|
Bonus(2)
|
|
100,000
|
|
|
|
|
|
|
Continuation of
benefits(3)
|
|
9,652
|
|
|
|
|
|
|
Vesting of options
|
|
Options vesting within 1 year of termination date will vest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$209,652
|
|
|
|
|
|
|
|
(1)
|
|
In addition to option acceleration
for certain of our named executive officers, in the event of
death or disability, each named executive officer is entitled to
receive: (i) his base salary through the date of
termination, (ii) a cash amount equal to the
executives accrued, unused vacation prorated for the
portion of the year worked, (iii) a bonus, if any, earned
for the prior fiscal year (or prior quarter, in the case of
Mr. Klotnia), to the extent not paid as of the
executives termination date and (iv) a pro rata bonus
for the fiscal year (or, in the case of Mr. Klotnia, a pro
rata bonus for the quarter) during which the termination occurs
that would have been earned and paid absent termination,
provided, in the case of Messrs. McCullen, Iserloth, Bokor
and Parkinson, such pro rata bonus shall be paid only if we paid
bonuses to other senior executives for such fiscal year.
|
(2)
|
|
In the event of termination without
cause or for good reason, each named executive officer is
entitled to receive a pro rata bonus for the fiscal year (or, in
the case of Mr. Klotnia, a pro rata bonus for the quarter)
during which the termination occurs that would have been earned
and paid absent termination, provided, in the case of
Messrs. McCullen, Iserloth, Bokor and Parkinson, such pro
rata bonus shall be paid only if we paid bonuses to other senior
executives for such fiscal year.
|
|
|
|
(3)
|
|
Amounts shown for continuation of
benefits represent estimates for the continuation of health
insurance for one year (or six months, in the case of
Mr. Parkinson pursuant to the terms of his employment
agreement on December 31, 2010) following the
executives termination.
|
|
|
|
(4)
|
|
Although their employment
agreements provide for the acceleration of all unvested stock
options in the event of termination without cause or for good
reason, termination upon death or disability or upon a change of
control, neither Mr. McCullen nor Mr. Bokor had any
outstanding options as of December 31, 2010.
|
125
|
|
|
(5)
|
|
Mr. Parkinsons
employment with us was terminated without cause on May 20,
2011. In connection with his termination, we entered into a
general release with Mr. Parkinson pursuant to which
Mr. Parkinson agreed to release us from any and all claims
which he may ever had or may presently have against us arising
from the beginning of time up to and including the date of the
release, including all matters in any way related to his
employment by us. Pursuant to the release, we agreed to the
following changes to Mr. Parkinsons termination
payments and benefits: (i) severance of $200,000, which is
equal to one year of his base salary (instead of six months as
provided in his employment agreement), (ii) continuation of
health insurance benefits for one year at an estimated cost of
$19,034 (instead of six months as provided in his employment
agreement) and (iii) immediate vesting of all of his
275,000 unvested stock options (instead of accelerated vesting
of only the unvested stock options that were scheduled to vest
within one year of his termination date as provided in his
employment agreement). In addition, Mr. Parkinson received
accrued and unpaid vacation of $24,615 and is expected to
receive a bonus in an amount to be determined under his 2011
sales bonus plan.
|
With respect to outstanding options held by our named executive
officers, our 2001 Stock Incentive Plan generally provides that,
in the event of a change in control, our board of directors may
take one or more of the following actions with respect to
outstanding options: (i) each outstanding option will be
assumed or an equivalent award substituted by the successor
corporation or an affiliate thereof, or (ii) such options
will terminate and each optionholder will receive in exchange a
cash payment equal tot the amount (if any) by which (a) the
per share consideration to be paid for each outstanding share of
our capital stock in the change of control multiplied by the
number of shares subject to the outstanding options exceeds
(b) the aggregate exercise price of such options.
Under the 2001 Stock Incentive Plan, change of
control is defined as any of the following events:
(i) any person(s) or a group of related persons becomes the
beneficial owner of our securities representing 50% or more of
the combined voting power represented by our then outstanding
voting securities; (ii) the consummation of a merger or
consolidation of our company with any other entity in which our
stockholders own less than 50% of the shares of the surviving
entity; (iii) the liquidation or dissolution of our
company; or (iv) the consummation of the sale or other
disposition by us of all or substantially all of our assets.
Director
Compensation
During 2010, we did not make any compensation payments to our
directors, but may determine to compensate both employee and
non-employee directors in the future. We do reimburse all
directors for reasonable
out-of-pocket
expenses they incur in connection with their service as
directors, including those incurred in connection with attending
all board and committee meetings. In addition, we issued a
warrant to Mr. Harvey, one of our directors, in connection
with him joining our board of directors on September 22,
2010. See Certain Relationships and Related Party
TransactionsOther Transactions and Agreements.
We expect to develop a compensation policy with respect to our
directors in connection with this offering.
Director
and Officer Indemnification and Limitation of
Liability
We have entered into indemnification agreements with certain of
our officers and directors pursuant to which we have agreed to
indemnify such persons against all expenses and liabilities
incurred or paid by such person in connection with any
proceeding arising from the fact that such person is or was an
officer or director of our company or one of our subsidiaries,
and to advance expenses as incurred by or on behalf of such
person in connection therewith.
Our amended and restated certificate of incorporation and
amended and restated bylaws will provide that we will indemnify
our directors and officers to the fullest extent permitted by
the DGCL. In addition, our amended and restated certificate of
incorporation will provide that our directors will not be liable
for monetary damages for breach of fiduciary duty, except for
liability (i) for any breach of the directors duty of
loyalty to us or our stockholders or (ii) for acts or
omissions not in good faith or acts or omissions that involve
intentional misconduct or a knowing violation of law.
In addition, prior to the completion of this offering, we will
enter into indemnification agreements with each of our executive
officers and directors. The indemnification agreements will
provide the executive officers and directors with contractual
rights to indemnification, expense advancement and
reimbursement, to the fullest extent permitted under the DGCL.
There is no pending litigation or proceeding naming any of our
directors or officers to which indemnification is being sought,
and we are not aware of any pending or threatened litigation
that may result in claims for indemnification by any director or
officer.
126
2011 Cash
and Equity Incentive Plan
In connection with this offering, we expect to adopt a 2011 Cash
and Equity Incentive Plan, or the 2011 Incentive
Plan. Upon adoption of the 2011 Incentive Plan, no further
grants will be made under our 2001 Stock Incentive Plan,
provided that grants outstanding under the 2001 Incentive Plan
will continue to be governed by such plan. The 2011 Incentive
Plan is expected to provide for grants of stock options, stock
appreciation rights, restricted stock and other stock-based
awards. Directors, officers and other employees of us and our
subsidiaries, as well as others performing consulting or
advisory services for us, will be eligible for grants under the
2011 Incentive Plan. The purpose of the 2011 Incentive Plan will
be to provide incentives that will attract, retain and motivate
high performing officers, directors, employees and consultants
by providing them a proprietary interest in our long-term
success or compensation based on their performance in fulfilling
their responsibilities to our company. The specific terms of the
2011 Incentive Plan are still being finalized. Set forth below
is a summary of the material terms of the 2011 Incentive Plan
based on our current discussions. This summary is preliminary
and may not include all of the provisions of the 2011 Incentive
Plan. For further information about the 2011 Incentive Plan, we
refer you to the complete copy of the 2011 Incentive Plan, which
we will file as an exhibit to the registration statement, of
which this prospectus is a part.
Administration. The 2011 Incentive Plan will
be administered by a committee designated by our board of
directors, which we expect to be our Compensation Committee.
Among the committees powers will be to determine the form,
amount and other terms and conditions of awards; clarify,
construe or resolve any ambiguity in any provision of the 2011
Incentive Plan or any award agreement; amend the terms of
outstanding awards; and adopt such rules, forms, instruments and
guidelines for administering the 2011 Incentive Plan as it deems
necessary or proper. The committee will have full authority to
administer and interpret the 2011 Incentive Plan, to grant
discretionary awards under the 2011 Incentive Plan, to determine
the persons to whom awards will be granted, to determine the
types of awards to be granted, to determine the terms and
conditions of each award, to determine the number of shares of
common stock to be covered by each award, to make all other
determinations in connection with the 2011 Incentive Plan and
the awards thereunder as the committee deems necessary or
desirable and to delegate authority under the 2011 Incentive
Plan to our executive officers.
Available Shares. The aggregate number of
shares of common stock which may be issued or used for reference
purposes under the 2011 Incentive Plan or with respect to which
awards may be granted may not
exceed shares,
which will be automatically increased on January 1 of each
year the 2011 Incentive Plan is in effect by the least of
(i) % of the total number of
shares outstanding on the last day of the immediately preceding
year, (ii) shares or
(iii) a lesser amount determined by the board of directors.
The number of shares available for issuance under the 2011
Incentive Plan may be subject to adjustment in the event of a
reorganization, stock split, merger or similar change in the
corporate structure or the number of outstanding shares of our
common stock. In the event of any of these occurrences, we may
make any adjustments we consider appropriate to, among other
things, the number and kind of shares, options or other property
available for issuance under the plan or covered by grants
previously made under the plan. The shares available for
issuance under the plan may be, in whole or in part, either
authorized and unissued shares of our common stock or shares of
common stock held in or acquired for our treasury. In general,
if awards under the 2011 Incentive Plan are for any reason
cancelled, or expire or terminate unexercised, the shares
covered by such awards may again be available for the grant of
awards under the 2011 Incentive Plan.
Eligibility for Participation. Members of our
board of directors, as well as employees of, and consultants to,
us or any of our subsidiaries and affiliates will be eligible to
receive awards under the 2011 Incentive Plan.
Award Agreement. Awards granted under the 2011
Incentive Plan will be evidenced by award agreements, which need
not be identical, that provide additional terms, conditions,
restrictions or limitations covering the grant of the award,
including, without limitation, additional terms providing for
the acceleration of exercisability or vesting of awards in the
event of a change of control or conditions regarding the
participants employment, as determined by the committee.
Stock Options. The committee may grant
nonqualified stock options and incentive stock options to
purchase shares of our common stock only to eligible employees.
The committee will determine the number of shares of our common
stock subject to each option, the term of each option, which may
not exceed ten years, or five years in the
127
case of an incentive stock option granted to a 10% or greater
stockholder, the exercise price, the vesting schedule, if any,
and the other material terms of each option. No incentive stock
option or nonqualified stock option may have an exercise price
less than the fair market value of a share of our common stock
at the time of grant or, in the case of an incentive stock
option granted to a 10% or greater stockholder, 110% of such
shares fair market value. Options will be exercisable at
such time or times and subject to such terms and conditions as
determined by the committee at grant and the exercisability of
such options may be accelerated by the committee.
Stock Appreciation Rights. The committee may
grant stock appreciation rights, or SARs, either
with a stock option, which may be exercised only at such times
and to the extent the related option is exercisable, or
Tandem SAR, or independent of a stock option, or
Non-Tandem SAR. A SAR is a right to receive a
payment in shares of our common stock or cash, as determined by
the committee, equal in value to the excess of the fair market
value of one share of our common stock on the date of exercise
over the exercise price per share established in connection with
the grant of the SAR. The term of each SAR may not exceed ten
years. The exercise price per share covered by an SAR will be
the exercise price per share of the related option in the case
of a Tandem SAR and will be the fair market value of our common
stock on the date of grant in the case of a Non-Tandem SAR. The
committee may also grant limited SARs, either as Tandem SARs or
Non-Tandem SARs, which may become exercisable only upon the
occurrence of a change in control, as defined in the 2011
Incentive Plan, or such other event as the committee may
designate at the time of grant or thereafter.
Restricted Stock. The committee may award
shares of restricted stock. Except as otherwise provided by the
committee upon the award of restricted stock, the recipient
generally will have the rights of a stockholder with respect to
the shares, including the right to receive dividends, the right
to vote the shares of restricted stock and, conditioned upon
full vesting of shares of restricted stock, the right to tender
such shares, subject to the conditions and restrictions
generally applicable to restricted stock or specifically set
forth in the recipients restricted stock agreement. The
committee may determine at the time of award that the payment of
dividends, if any, will be deferred until the expiration of the
applicable restriction period.
Recipients of restricted stock will be required to enter into a
restricted stock agreement with us that states the restrictions
to which the shares are subject, which may include satisfaction
of pre-established performance goals, and the criteria or date
or dates on which such restrictions will lapse.
If the grant of restricted stock or the lapse of the relevant
restrictions is based on the attainment of performance goals,
the committee will establish for each recipient the applicable
performance goals, formulae or standards and the applicable
vesting percentages with reference to the attainment of such
goals or satisfaction of such formulae or standards while the
outcome of the performance goals are substantially uncertain.
Such performance goals may incorporate provisions for
disregarding, or adjusting for, changes in accounting methods,
corporate transactions, including, without limitation,
dispositions and acquisitions, and other similar events or
circumstances. Section 162(m) of the Code requires that
performance awards be based upon objective performance measures.
The performance goals for performance-based restricted stock
will be based on one or more of the objective criteria set forth
in the 2011 Incentive Plan and are discussed in general below.
Other Stock-Based Awards. The committee may,
subject to limitations under applicable law, make a grant of
such other stock-based awards, including, without limitation,
performance units, dividend equivalent units, stock equivalent
units, restricted stock and deferred stock units under the 2011
Incentive Plan that are payable in cash or denominated or
payable in or valued by shares of our common stock or factors
that influence the value of such shares. The committee may
determine the terms and conditions of any such other awards,
which may include the achievement of certain minimum performance
goals for purposes of compliance with Section 162(m) of the
Code and a minimum vesting period. The performance goals for
performance-based other stock-based awards will be based on one
or more of the objective criteria set forth on Exhibit A to
the 2011 Incentive Plan and discussed in general below.
Other Cash-Based Awards. The committee may
grant awards payable in cash. Cash-based awards shall be in such
form, and dependent on such conditions, as the committee shall
determine, including, without limitation, being subject to the
satisfaction of vesting conditions or awarded purely as a bonus
and not subject to restrictions or conditions. If a cash-based
award is subject to vesting conditions, the committee may
accelerate the vesting of such award in its discretion.
128
Performance Awards. The committee may grant a
performance award to a participant payable upon the attainment
of specific performance goals. The committee may grant
performance awards that are intended to qualify as
performance-based compensation under Section 162(m) of the
Code as well as performance awards that are not intended to
qualify as performance-based compensation under
Section 162(m) of the Code. If the performance award is
payable in cash, it may be paid upon the attainment of the
relevant performance goals either in cash or in shares of
restricted stock, based on the then current fair market value of
such shares, as determined by the committee. Based on service,
performance or other factors or criteria, the committee may, at
or after grant, accelerate the vesting of all or any part of any
performance award.
Performance Goals. The committee may grant
awards of restricted stock, performance awards, and other
stock-based awards that are intended to qualify as
performance-based compensation for purposes of
Section 162(m) of the Code. These awards may be granted,
vest and be paid based on attainment of specified performance
goals or the attainment of a certain target level of, or a
specified increase or decrease in, one or more financial or
other operational measures as may be determined by the committee.
To the extent permitted by law, the committee may also exclude
the impact of an event or occurrence which the committee
determines should be appropriately excluded, such as
(1) restructurings, discontinued operations, extraordinary
items and other unusual or non-recurring charges; (2) an
event either not directly related to our operations or not
within the reasonable control of management; or (3) a
change in accounting standards required by generally accepted
accounting principles.
Performance goals may also be based on an individual
participants performance goals, as determined by the
committee.
In addition, all performance goals may be based upon the
attainment of specified levels of our performance, or the
performance of a subsidiary, division or other operational unit,
under one or more of the measures described above relative to
the performance of other corporations. The committee may
designate additional business criteria on which the performance
goals may be based or adjust, modify or amend those criteria.
Change in Control. In connection with a change
in control, as will be defined in the 2011 Incentive Plan, the
committee may accelerate vesting of outstanding awards under the
2011 Incentive Plan. In addition, such awards may be, in the
discretion of the committee, (1) assumed and continued or
substituted in accordance with applicable law;
(2) purchased by us for an amount equal to the excess of
the price of a share of our common stock paid in a change in
control over the exercise price of the awards; or
(3) cancelled if the price of a share of our common stock
paid in a change in control is less than the exercise price of
the award. The committee may also provide for accelerated
vesting or lapse of restrictions of an award at any time.
Stockholder Rights. Except as otherwise
provided in the applicable award agreement, and with respect to
an award of restricted stock, a participant will have no rights
as a stockholder with respect to shares of our common stock
covered by any award until the participant becomes the record
holder of such shares.
Amendment and Termination. Notwithstanding any
other provision of the 2011 Incentive Plan, our board of
directors may at any time amend any or all of the provisions of
the 2011 Incentive Plan, or suspend or terminate it entirely,
retroactively or otherwise; provided, however, that, unless
otherwise required by law or specifically provided in the 2011
Incentive Plan, the rights of a participant with respect to
awards granted prior to such amendment, suspension or
termination may not be adversely affected without the consent of
such participant.
Transferability. Awards granted under the 2011
Incentive Plan generally will be nontransferable, other than by
will or the laws of descent and distribution, except that the
committee may provide for the transferability of nonqualified
stock options at the time of grant or thereafter to certain
family members.
Recoupment of Awards. The 2011 Incentive Plan
will provide that awards granted under the 2011 Incentive Plan
are subject to any recoupment policy we may have in place or any
obligation that we may have regarding the clawback of
incentive-based compensation under the Exchange Act
or under any applicable rules and regulations promulgated by the
SEC.
Effective Date. We expect that the 2011
Incentive Plan will be adopted in connection with this offering.
129
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of May 31,
2011, after giving effect to the Recapitalization, including the
conversion of our outstanding Class A common stock,
Class B common stock and preferred stock into a single
class of common stock and the one-for- reverse stock split in
connection therewith, and the anticipated beneficial ownership
percentages immediately following this offering, by:
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each person or group who is known by us to own beneficially more
than 5% of our outstanding shares of common stock;
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each of our named executive officers;
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each of our directors; and
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all of our executive officers and directors as a group.
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Each stockholders percentage ownership before the offering
is based
on shares
of our common stock outstanding as of May 31, 2011, as
adjusted to give effect to the Recapitalization. Each
stockholders percentage ownership after the offering is
based
on shares
of our common stock outstanding immediately after the completion
of this offering. We have granted the underwriters an option to
purchase up
to
additional shares of our common stock to cover over-allotments,
if any, and the table below assumes no exercise of that option.
Beneficial ownership for the purposes of the following table is
determined in accordance with the rules and regulations of the
SEC. These rules generally provide that a person is the
beneficial owner of securities if such person has or shares the
power to vote or direct the voting thereof, or to dispose or
direct the disposition thereof or has the right to acquire such
powers within 60 days. Common stock subject to options that
are currently exercisable or exercisable within 60 days of
May 31, 2011 are deemed to be outstanding and beneficially
owned by the person holding the options. These shares, however,
are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. Except as disclosed in
the footnotes to this table and subject to applicable
130
community property laws, we believe that each stockholder
identified in the table possesses sole voting and investment
power over all shares of common stock shown as beneficially
owned by the stockholder.
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Percentage of Shares
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Shares
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Beneficially Owned
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Beneficially
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Before the
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After the
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Owned
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Offering
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Offering
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5% Stockholders:
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FTV
Capital(1)
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%
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%
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MBK Ventures,
LLC(2)
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DBRC Investments,
LLC(3)
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First Analysis
Funds(4)
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SRBA #5,
L.P.(5)
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Named Executive Officers and Directors:
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Robert
McCullen(6)
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Mark
Iserloth(7)
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Andrew
Bokor(8)
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Douglas
Klotnia(9)
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David
Parkinson(10)
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Kevin Bradford
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Richard
Garman(11)
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Stuart
Harvey(12)
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Richard
Kiphart(13)
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Timothy
Nicholson(14)
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Joseph Patanella
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Howard
Smith(15)
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All executive officers and directors as a group (12 persons)
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%
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%
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*
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Represents beneficial ownership of
less than 1% of our outstanding common stock.
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(1)
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Includes:
(i) shares
of common stock held by Financial Technology Ventures II
(Q), L.P., or FTV (Q),
(ii) shares
of common stock held by Financial Technology Ventures II, L.P.,
or FTV II,
(iii) shares
of common stock held by FTVentures III, L.P., or
FTV III,
(iv) shares
of common stock held by
FTVentures III-N,
L.P., or
FTV III-N,
and
(v) shares
of common stock held by
FTVentures III-T,
or
FTV III-T.
Financial Technology Management II, L.L.C. is the sole general
partner of each of FTV (Q) and FTV II, or collectively
FTV II, and, in that capacity, exercises voting
and dispositive control over the shares held by such entities.
FTVentures Management III, L.L.C. is the sole general partner of
each of FTV III,
FTV III-N
and
FTV III-T,
or collectively FTV III, and, in that capacity,
exercises voting and dispositive control over the shares held by
such entities. The business address for Financial Technology
Management II, L.L.C., FTV II, FTVentures Management III,
L.L.C. and FTV III is
c/o FTV
Capital, 555 California Street, Suite 2900,
San Francisco, California 94104.
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(2)
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Each of Messrs. Bokor and
McCullen serve as Managers of MBK Ventures and, in such
capacity, exercise voting and dispositive control over the
shares held by MBK Ventures. The business address for MBK
Ventures is 70 West Madison, Suite 1050, Chicago,
Illinois 60602.
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(3)
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DBRC Investments, LLC, or
DBRC, is controlled by its members,
Messrs. Raymond Curran, Devon Bruce and Joseph Power. In
their capacities as managing members, Messrs. Curran, Bruce
and Power exercise voting and dispositive power with respect
to shares
owned by DBRC. DBRC has granted an irrevocable proxy to Robert
McCullen to vote shares owned by DBRC.
The proxy does not grant Mr. McCullen dispositive power
with respect to such shares. The proxy terminates upon the
earlier to occur of June 13, 2011 and the consummation of a
qualified public offering of the Company, which
includes this offering. Mr. McCullen disclaims beneficial
ownership of these shares. The business address for DBRC and
each of Messrs. Curran, Bruce and Power is
c/o DBRC
Investments, LLC, 70 W. Madison St., Suite 5500,
Chicago, Illinois 60602.
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(4)
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Includes: (i) shares of common
stock held by The Productivity Fund IV, L.P., or
Productivity Fund IV,
(ii) shares
of common stock held by The Productivity Fund IV Advisors
Fund, L.P., or Advisors Fund;
(iii) shares
of common stock held by FA Private Equity Fund IV, L.P., or
FA PE Fund; and
(iv) shares
of common stock held by FA Private Equity Fund IV
GmbH & Co Beteiligungs KG, or
Fund GmbH, and collectively, the First
Analysis Funds. First Analysis Management Company IV,
L.L.C., or Management Company IV, is the sole
general partner of each of Productivity Fund IV and
Advisors Fund. First Analysis Venture Operations and Research,
L.L.C., or FAVOR, is the managing member of
Management Company IV and, in that capacity, exercises
voting and dispositive control over the shares held by
Productivity Fund IV and Advisors Fund. FA Private Equity
Management IV, L.L.C., or FA Management, is the
general partner of FA PE Fund and the managing limited partner
of Fund GmbH and, in those capacities,
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exercises voting and dispositive
control over the shares held by FA PE Fund and Fund GmbH.
FAVOR, in turn, is the managing member of FA Management. First
Analysis Corporation is the manager of FAVOR and, in that
capacity, may be deemed to share voting and dispositive power
with respect to the shares that may be deemed to be beneficially
owned by FAVOR. The business address for the First Analysis
Funds, FAVOR, FA Management and First Analysis Corporation is
c/o First
Analysis, 1 S. Wacker Drive, Suite 3900, Chicago,
Illinois 60606.
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(5)
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Hallman Management Trust is the
sole general partner of SRBA #5, L.P., or SRBA.
William P. Hallman, Jr. is the sole trustee of the Hallman
Management Trust and, in that capacity, exercises voting and
dispositive control over the shares held by SRBA.
Mr. Hallman disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein. The
business address for SRBA #5, L.P., the Hallman Management Trust
and Mr. Hallman is
c/o Sid
R. Bass Associates, LP, 201 Main Street, 32nd Floor, Forth
Worth, Texas 76102.
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(6)
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Represents shares owned by MBK
Ventures. Mr. McCullen is a Manager of MBK Ventures and, as
a result, may be deemed to be a beneficial owner of the shares
of common stock owned by MBK Ventures. See note 2 above.
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(7)
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Includes an aggregate
of shares
of common stock that can be acquired within 60 days upon
the exercise of outstanding options,
including shares
subject to options that will vest upon consummation of this
offering.
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(8)
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Represents shares owned by MBK
Ventures, LLC. Mr. Bokor is a Manager of MBK Ventures, LLC
and, as a result, may be deemed to be a beneficial owner of the
shares of common stock owned by MBK Ventures, LLC. See
note 2 above.
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(9)
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Includes an aggregate
of shares
of common stock that can be acquired within 60 days upon
the exercise of outstanding options.
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(10)
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Includes an aggregate
of shares
of common stock that can be acquired within 60 days upon
the exercise of outstanding options.
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(11)
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Mr. Garman is a Managing
Member of each of Financial Technology Management II, L.L.C. and
FTVentures Management III, L.L.C. As a result,
Mr. Garman may be deemed to be the beneficial owner of the
shares of common stock owned by FTV II and FTV III.
See note 1 above.
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(12)
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Includes shares
of common stock issuable upon the exercise of outstanding
warrants. See Certain Relationships and Related Party
Transactions-Other Transaction and Agreements.
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(13)
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Mr. Kiphart is also a
beneficial owner of more than 5% of our outstanding shares of
common stock. The business address for Mr. Kiphart is
c/o William
Blair & Company, L.L.C., 222 West Adams Street,
Chicago, Illinois 60606.
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(14)
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Represents shares
owned by Nicholson Acquisition, L.P.
and shares
owned by Caledonian Investments, L.P. Nicholson Asset
Management, LLC, of which Mr. Nicholson is the Managing
Director, is the general partner of Nicholson Acquisition, L.P.
Mr. Nicholson is the sole owner and Managing Director of
Caledonian Corporation, which is the General Partner of
Caledonia Investments LP. Mr. Nicholson is also a Limited
Partner in Caledonia Investments LP. As a result,
Mr. Nicholson may be deemed to be a beneficial owner of the
shares of common stock owned by Nicholson Acquisition, L.P. and
Caledonian Investments, L.P. Mr. Nicholson disclaims
beneficial ownership of these shares except to the extent of his
pecuniary interest therein.
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(15)
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Mr. Smith is a Managing
Director of First Analysis Corporation and, as a result, may be
deemed to share voting and dispositive power with respect to the
shares that may be deemed to be beneficially owned by First
Analysis Corporation. Mr. Smith disclaims beneficial
ownership of these shares except to the extent of his pecuniary
interest therein.
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132
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our board of directors currently is primarily responsible for
developing and implementing processes and controls to obtain
information from our directors, executive officers and
significant stockholders regarding related-person transactions
and then determining, based on the facts and circumstances,
whether we or a related person has a direct or indirect material
interest in these transactions. Following this offering, we
expect that our audit committee will be responsible for the
review, approval and ratification of related-person
transactions between us and any related person. Under SEC
rules, a related person is an officer, director, nominee for
director or beneficial holder of more than of 5% of any class of
our voting securities since the beginning of the last fiscal
year or an immediate family member of any of the foregoing. In
the course of its review and approval or ratification of a
related-person transaction, the audit committee will consider:
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the nature of the related persons interest in the
transaction;
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the material terms of the transaction, including the amount
involved and type of transaction;
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the importance of the transaction to the related person and to
our company;
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whether the transaction would impair the judgment of a director
or executive officer to act in our best interest and the best
interest of our stockholders; and
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any other matters the audit committee deems appropriate.
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Any member of the audit committee who is a related person with
respect to a transaction under review will not be able to
participate in the deliberations or vote on the approval or
ratification of the transaction. However, such a director may be
counted in determining the presence of a quorum at a meeting of
the committee that considers the transaction.
Other than compensation agreements and other arrangements which
are described under Executive Compensation, and the
transactions described below, since January 1, 2008, there
has not been, and there is not currently proposed, any
transaction or series of similar transactions to which we were
or will be a party in which the amount involved exceeded or will
exceed $120,000 and in which any related person had or will have
a direct or indirect material interest.
Investor
Rights Agreement
We have entered into an Investor Rights Agreement with certain
of our stockholders pursuant to which we have agreed to extend
to such stockholders registration rights, information rights and
certain other rights. The parties to the Investor Rights
Agreement include: (i) FTV Capital, MBK Ventures, DBRC,
SRBA and the First Analysis Funds, each of which beneficially
owns more than 5% of our outstanding shares of common stock;
(ii) Caledonian Investments, L.P. and Nicholson
Acquisition, L.P., through which one of our directors, Timothy
Nicholson, beneficially owns shares of our common stock;
(iii) Richard Kiphart, one of our directors and a
beneficial owner of more than 5% of our outstanding shares of
common stock; and (iv) Joseph Patanella, one of our
directors.
Demand Rights. At any time following
180 days after we have completed an initial public
offering, including the offering contemplated by this
prospectus, our Series A preferred stockholders
representing at least 20% of our Class A common stock
(including Class A common stock issued or issuable upon
conversion of our Series A preferred stock but excluding
Class A common stock held by certain stockholders) may
require that we register their shares under the Securities Act.
Upon the request for a demand registration, we must notify other
stockholders of the request and give them the opportunity to
request that their shares be included in the registration.
We call the right to require us to register shares a
demand right and the resulting registration a
demand registration. Stockholders with demand rights
are entitled to request two registrations on
Form S-1
in total and two registrations on
Form S-3
per calendar year.
Piggyback Rights. The stockholders party to
the Investor Rights Agreement can request to participate in
registrations of any of our securities for sale by us or by a
third party. We call this right a piggyback right
and the resulting registration a piggyback
registration.
133
Conditions and Limitations; Expenses. The
registration rights outlined above are subject to conditions and
limitations, including (i) the right of the underwriters to
limit the number of shares to be included in a registration
statement, (ii) with respect to demand registrations, the
right of the initiating stockholders to withdraw the
registration statement and (iii) with respect to a
piggyback registration, our right to withdraw the registration
statement under specified circumstances.
With respect to both demand registrations and piggyback
registrations, if the offering is an underwritten offering, the
stockholders right to include its shares in such
registration will be conditioned upon such stockholders
participation in the underwritten offering and entering into an
underwriting agreement with the underwriters.
We are not required to effect a demand registration
(i) prior to 180 days following the effective date of
a registration statement pertaining to our initial public
offering or (ii) during the period starting with the date
of filing of, and ending on the date that is 180 days
following the effective date of, a registration statement
pertaining to any underwritten public offering made pursuant to
the demand registration rights in the Investor Rights Agreement
or in which the holders of demand registration rights were given
the opportunity to participate.
The underwriters in any demand registration will be selected by
the holders of a majority of the shares with demand rights that
are included in the registration and must be reasonably
acceptable to the Company.
Other than underwriting discounts and commissions, we will pay
all registration expenses in connection with a registration,
including the expense of a single special counsel to the holders
for each registration (such expense not to exceed $50,000).
Indemnification. We have agreed to indemnify
each holder of the securities covered by the Investor Rights
Agreement, and their partners, members, managers, officers,
directors, stockholders, employees and agent, and any
underwriter for such holder, against any losses arising out of
(i) any untrue statement or alleged untrue statement of a
material fact contained in any registration statement,
preliminary prospectus or final prospectus, or the omission or
alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, or (ii) any violation or alleged violation of
federal or state securities laws. Each holder of such securities
has in turn agreed to indemnify the Company against any losses
arising out of any untrue statement or alleged untrue statement
of a material fact contained in written information furnished by
such holders specifically for use in connection with such
registration, or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading.
Lock Up Agreement. Each holder has agreed that
it will not sell or otherwise transfer or dispose of any
securities of the Company for a period specified by the
underwriters of any registration for a period not to exceed
ninety (90) days or, in the case of the Companys
initial public offering (including this offering) or if required
by the underwriters, a period not to exceed 180 days
following the effective date of a registration statement filed
under the Securities Act; provided that all officers and
directors of the Company and all stockholders party to the
Investor Rights Agreement that own at least 2% of the
Companys common stock (on an as-converted basis) enter
into similar agreements, and to the extent any holder is
released from such restriction during the restricted period,
then the remaining holders shall be released from such
restriction in the same proportion.
Preemptive Rights. Each stockholder that is an
accredited investor (as such term is defined in
Regulation D of the Securities Act) and that owns at least
10% of the shares of Series A preferred stock or over
100,000 shares of Class A common stock has the right
to purchase its pro rata portion of equity securities that we
may, from time to time, propose to sell and issue after the date
of the Investor Rights Agreement. The preemptive rights do not
apply to this offering and will terminate upon the effective
date of the registration statement to which this prospectus
relates.
Information Rights. The Company is obligated
to provide financial and other information to certain
stockholders on a monthly, quarterly and yearly basis. These
rights will automatically terminate upon the completion of this
offering.
134
Stockholders
Agreement
We have entered into a Stockholders Agreement with certain of
our stockholders, including: (i) FTV Capital, MBK Ventures,
DBRC, SRBA and the First Analysis Funds, each of which
beneficially owns more than 5% of our outstanding shares of
common stock; (ii) Caledonian Investments, L.P. and
Nicholson Acquisition, L.P., through which one of our directors,
Timothy Nicholson, beneficially owns shares of our common stock;
(iii) Richard Kiphart one of our directors and a beneficial
owner of more than 5% of our outstanding shares of common stock;
and (iv) Joseph Patanella, one of our directors. Certain
provisions of the Stockholders Agreement are summarized below.
Each of FTV Capital, Richard Kiphart and MBK Ventures has the
right to nominate two individuals to our board of directors, and
the stockholders must vote their shares to elect such nominees,
and certain stockholders, or the SecurePipe Holders,
have the right to nominate one individual to our board of
directors, and the stockholders must vote their shares to elect
such nominee. In addition, the holders of a majority of the
issued and outstanding shares of our Class A and
Class B common stock, or the Majority Holders,
have the right to nominate two individuals to our board of
directors, and the stockholders must vote their shares to elect
such nominees. Of our current directors, Messrs. Garman and
Bradford were nominated by FTV Capital, Mr. Kiphart was
nominated by himself, Messrs. McCullen and Bokor were
nominated by MBK Ventures, Mr. Smith was nominated by the
SecurePipe Holders and Messrs. Patanella and Nicholson were
nominated by the Majority Holders.
Any stockholder who has the right to nominate two directors will
lose the right to nominate one of those directors if at any time
it holds less than 50% of the stock that it held as of the date
of the Stockholders Agreement. If a stockholders ownership
falls below 20% of the stock that it held as of the date of the
Stockholders Agreement, then it will lose its right to nominate
any director. Any vacancy on the board which is not filled by
the designated directors will be filled by a vote of the holders
of a majority of the common stock. In addition, FTV Capital, the
SecurePipe Holders and SRBA each have the right to nominate one
observer who may attend board meetings.
In addition, the Stockholders Agreement includes:
(i) covenants which impose operational restrictions on the
Company; (ii) restrictions on the ability of the parties to
the Stockholders Agreement to transfer or otherwise dispose of
their shares; (iii) a right of first refusal if any
stockholder desires to sell any shares to a person who is not a
permitted transferee; (iv) tag-along rights;
and (v) drag-along rights.
The Stockholders Agreement will automatically terminate upon the
completion of this offering.
Other
Transactions and Agreements
On September 22, 2010, in connection with Stuart Harvey
joining our board of directors, we issued Mr. Harvey a
warrant entitling its holder to purchase 500,000 shares of
our Class A common stock at an exercise price of $2.05 per
share. The warrant is exercisable at any time or from time to
time on or prior to September 21, 2015. The number of
shares issuable upon exercise of the warrant and the exercise
price are subject to adjustment in the case of any stock
dividends, stock splits, reclassification or other similar
events affecting the Companys Class A common stock.
In addition, from April 2008 until August 2010,
Mr. Harvey was the President and Chief Executive Officer of
Elavon Global Acquisition Solutions (a subsidiary of
U.S. Bank), our largest customer. During 2009 and 2010, we
recognized revenue from U.S. Bank in the amount of
$8.4 million and $11.1 million, respectively.
Richard Kiphart, one of our directors and a greater than 5%
stockholder, is the head of William Blair & Company,
L.L.C.s Private Client Advisors and a member of that
firms executive committee. William Blair &
Company, L.L.C. is one of the underwriters of this offering and,
in that capacity, will receive customary fees and compensation
from us. We have agreed to sell to William Blair & Company
L.L.C. in this
offering shares
of common stock on which it will receive a discount and
commission of
$ per
share, or
$ in
the aggregate. See Underwriting-Other Relationships.
Upon completion of this offering, Mr. Kiphart will
beneficially
own shares,
or %, of our outstanding common
stock and members of his immediate family will beneficially
own shares,
or %, of our outstanding common
stock. William Blair Capital Partners VII QP, L.P. and William
Blair Capital Partners VII, L.P. will hold an aggregate
of shares,
or % of our common stock upon
completion of their offering.
135
Kevin Bradford, our former Chairman and Chief Executive Officer
and currently one of our directors, will be entitled to a
$250,000 payment from us in connection with the completion of
this offering pursuant to the employment arrangement he
previously had with us.
We have entered into indemnification agreements with MBK
Ventures and FTV Capital pursuant to which we have agreed to
indemnify each such entity and its affiliates against all
expenses and liabilities incurred or paid by such entity or its
affiliates in connection with any proceeding arising from the
fact that such entity or its affiliates is or has nominated a
director of our company or one of our subsidiaries, and to
advance expenses as incurred by or on behalf of such entity or
its affiliates in connection therewith.
Prior to the completion of this offering, we expect to enter
into indemnity agreements with each of our directors and
executive officers in which we will agree to indemnify, defend
and hold harmless, and also advance expenses as incurred, to the
fullest extent permitted under applicable law, from damage
arising from the fact that such person is or was an officer or
director of our company or our subsidiaries.
136
DESCRIPTION
OF CERTAIN INDEBTEDNESS
Amended
and Restated Loan and Security Agreement
On August 19, 2009, we entered into an Amended and Restated
Loan Agreement, as amended, or the Loan Agreement,
with Silicon Valley Bank, or SVB. We, along with
certain of our subsidiaries, are borrowers under the Loan
Agreement. The Loan Agreement provides for a revolving credit
facility of up to $20.0 million and the issuance of letters
of credit in a face amount not to exceed $2.5 million, with
the outstanding amount of letters of credit reducing the amount
available under the revolving facility. As of March 31,
2011, we had no borrowings outstanding and $2.0 million of
outstanding letters of credit under the Loan Agreement.
Interest Rate. Borrowings under the revolving
facility bear interest at floating per annum rates equal to the
greater of (i) 4.5% per annum and (ii) SVBs most
recently announced prime rate, even if it is not
SVBs lowest rate. In addition, there is a fee payable
quarterly in an amount equal to 0.25% per annum of the average
unused portion of the facility.
Maturity. The Loan Agreement has a scheduled
maturity of November 30, 2011.
Security. The borrowers have granted SVB a
first priority perfected security interest in substantially all
present and future assets of the borrowers, including goods,
accounts, equipment, inventory, contract rights, leases, license
agreements, general intangibles, intellectual property,
commercial tort claims, instruments, cash, deposit accounts,
securities and all other investment properties.
Affirmative Covenants. The Loan Agreement
contains customary affirmative covenants, including
(i) maintenance of legal existence and compliance with laws
and regulations, (ii) delivery of consolidated financial
statements and other information, (iii) maintenance of
inventory in good and marketable condition, (iv) payment of
taxes, (v) maintenance of adequate insurance,
(vi) maintenance of operating accounts with SVB and
(vii) protection and registration of intellectual property.
Negative Covenants. The Loan Agreement
contains customary negative covenants, including restrictions on
(i) the sale, transfer or disposition of assets and
businesses, (ii) changes in business, management, ownership
and business locations, (iii) mergers and consolidations,
(iv) indebtedness, (v) liens and other encumbrances,
(vi) investments and dividends and other distributions on
capital stock, (vii) transactions with affiliates and
(viii) the payment or amendment of subordinated debt.
Financial Covenants. We are required to comply
with financial covenants that, among other things, require us to
maintain a minimum amount of unrestricted cash and cash
equivalents with SVB as of the end of each month, generate a
minimum amount of EBITDA on a quarterly basis and annual limits
on the amount of our capital expenditures.
Events of Default. The Loan Agreement contains
customary events of default (with customary grace periods and
thresholds), including (i) failure to pay principal,
interest or other obligations when due, (ii) failure to
perform or observe covenants, (iii) a material adverse
change affecting the borrowers, (iv) attachment or seizure
of or levy on borrowers assets, (v) bankruptcy and
insolvency, (vi) cross-defaults to other indebtedness in an
amount not less than $50,000, (vii) monetary judgments in
an amount not less than $50,000, (viii) incorrectness of
representations and warranties in any material respect and
(ix) the termination of any guaranty or a material
impairment in the perfection or priority of SVBs lien.
Additional Information. The foregoing is a
brief summary of the material terms of the Loan Agreement. We
have filed a copy of the complete Loan Agreement as an exhibit
to the registration statement of which this prospectus forms a
part. See Where You Can Find More Information.
137
DESCRIPTION
OF CAPITAL STOCK
The following is a description of the material terms of our
amended and restated certificate of incorporation and amended
and restated bylaws as will be in effect upon completion of this
offering. The following description may not contain all of the
information that is important to you. To understand them fully,
you should read our amended and restated certificate of
incorporation and amended and restated bylaws, copies of which
are or will be filed with the SEC as exhibits to the
registration statement of which this prospectus is a part. See
Where You Can Find More Information.
Authorized
Capitalization
Our amended and restated certificate of incorporation will
provide that our authorized capital stock will consist
of shares
of common stock, par value $0.01 per share, and
5,000,000 shares of undesignated preferred stock, par value
$0.01 per share. Upon completion of this offering, we will
have shares
of common stock outstanding and no shares of preferred stock
outstanding after giving effect to the conversion of our
previously outstanding Class A common stock, Class B
common stock and preferred stock into a single class of common
stock, the one-for- reverse stock split and the issuance and
sale of shares of common stock in this offering. Upon completion
of this
offering, shares
of our common stock will be issuable upon the exercise of
outstanding stock options at a weighted average exercise price
of $ .
We currently have five outstanding classes of capital stock, all
of which will be converted into a single class of common stock
on a
share-for-share
basis in connection with the Recapitalization. The table below
sets forth certain information regarding our outstanding capital
stock as of March 31, 2011:
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Class of Capital Stock
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Number of Shares
Outstanding
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Number of Record
Holders
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Class A common stock
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93,509,597
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181
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Class B common stock
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4,945,371
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51
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Series A-1
preferred stock
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10,952,633
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2
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Series A-2
preferred stock
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11,505,258
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4
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Series B preferred stock
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5,882,351
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14
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Common
Stock
Voting
Rights
Each share of common stock entitles the holder to one vote with
respect to each matter presented to our stockholders on which
the holders of common stock are entitled to vote. Our common
stock votes as a single class on all matters relating to the
election and removal of directors on our board of directors and
as provided by law. Holders of our common stock will not have
cumulative voting rights. Except in respect of matters relating
to the election and removal of directors on our board of
directors and as otherwise provided in our amended and restated
certificate of incorporation or required by law, all matters to
be voted on by our stockholders must be approved by a majority
of the shares present in person or by proxy at the meeting and
entitled to vote on the subject matter. In the case of election
of directors, all matters to be voted on by our stockholders
must be approved by a plurality of the votes entitled to be cast
by all shares of common stock.
Dividend
Rights
Subject to preferences that may be applicable to any then
outstanding preferred stock, the holders of our outstanding
shares of common stock are entitled to receive dividends, if
any, as may be declared from time to time by our board of
directors out of legally available funds. Because we are a
holding company, our ability to pay dividends on our common
stock is limited by restrictions on the ability of our
subsidiaries to pay dividends or make distributions to us,
including restrictions under the terms of the agreements
governing our indebtedness. For additional information, see
Dividend Policy and Description of Certain
Indebtedness.
138
Liquidation
Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, holders of our common
stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment
of our debts and other liabilities. If we have any preferred
stock outstanding at such time, holders of the preferred stock
may be entitled to distribution and liquidation preferences. In
either such case, we will be required to pay the applicable
distribution to the holders of our preferred stock before we may
pay distributions to the holders of our common stock.
Other
Rights
Our stockholders have no preemptive, conversion or other rights
to subscribe for additional shares. All outstanding shares are,
and all shares offered by this prospectus will be, when sold,
validly issued, fully paid and nonassessable. The rights,
preferences and privileges of the holders of our common stock
are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of our preferred stock that
we may designate and issue in the future.
Listing
We intend to apply to list our common stock
on
under the proposed symbol
.
Undesignated
Preferred Stock
Our certificate of incorporation will authorize our board of
directors to provide for the issuance of up to
5,000,000 shares of preferred stock in one or more series
and to fix the preferences, powers and relative, participating,
optional or other special rights, and qualifications,
limitations or restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption rights and
liquidation preference, and to fix the number of shares to be
included in any such series without any further vote or action
by our stockholders. Any preferred stock so issued may rank
senior to our common stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding
up, or both. The issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of our
company without further action by the stockholders and may
adversely affect the voting and other rights of the holders of
common stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to
others. At present, we have no plans to issue any of the
preferred stock.
Warrants
As of March 31, 2011, we had outstanding warrants to
purchase an aggregate of 1,640,103 shares of our
Class A common stock. The table below sets forth certain
information with respect to these outstanding warrants:
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Number of Shares
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Exercise Price
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Expiration Date
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82,639
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$
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6.05
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June 12, 2014
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500,000
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2.05
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September 21, 2015
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25,000
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3.00
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November 13, 2015
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78,580
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0.83
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April 26, 2016
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953,884
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1.08
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February 28, 2020
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Holders may exercise their warrants at any time or from time to
time. The number of shares issuable upon exercise of the
warrants and the exercise prices are subject to adjustment in
the case of any stock dividends, stock splits, reclassification
or other similar events affecting our Class A common stock.
In connection with the Recapitalization, each of our outstanding
warrants will relate to shares of common stock and otherwise be
appropriately adjusted to give effect to reverse stock split.
For more information regarding these warrants, see note 10
to the notes to our consolidated financial statements included
elsewhere in this prospectus.
139
Registration
Rights
For a description of the registration rights of certain of our
stockholders, see Certain Relationships and Related Party
Transactions Investor Rights Agreement.
Antitakeover
Effects of Delaware Law and Our Certificate of Incorporation and
Bylaws
Our amended and restated certificate of incorporation and
amended and restated bylaws will also contain provisions that
may delay, defer or discourage another party from acquiring
control of us. We expect that these provisions, which are
summarized below, will discourage coercive takeover practices or
inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first
negotiate with our board of directors, which we believe may
result in an improvement of the terms of any such acquisition in
favor of our stockholders. However, they also give our board of
directors the power to discourage acquisitions that some
stockholders may favor.
Undesignated
Preferred Stock
The ability to authorize undesignated preferred stock will make
it possible for our board of directors to issue preferred stock
with super voting, special approval, dividend or other rights or
preferences on a discriminatory basis that could impede the
success of any attempt to acquire us. These and other provisions
may have the effect of deferring, delaying or discouraging
hostile takeovers or changes in control or management of our
company.
Classified
Board of Directors
Our amended and restated certificate of incorporation will
provide that our board of directors will be divided into three
classes, with each class serving three-year staggered terms. In
addition, our amended and restated certificate of incorporation
will provide that directors may only be removed from the board
of directors with cause and by an affirmative vote of
662/3%
of our common stock. These provisions may have the effect of
deferring, delaying or discouraging hostile takeovers or changes
in control or management of our company.
Requirements
for Advance Notification of Stockholder Meetings, Nominations
and Proposals
Our amended and restated certificate of incorporation will
provide that, except as otherwise required by law, special
meetings of the stockholders may be called only by the chairman
of the board of directors or pursuant to a resolution adopted by
a majority of the total number of directors then in office. In
addition, our amended and restated bylaws will establish an
advance notice procedure for stockholder proposals to be brought
before an annual or special meeting of our stockholders,
including proposed nominations of persons for election to our
board of directors. Stockholders at an annual or special meeting
may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the
direction of our board of directors or by a stockholder who was
a stockholder of record on the record date for the meeting, who
is entitled to vote at the meeting and who has given our
secretary timely written notice, in proper form, of the
stockholders intention to bring that business before the
meeting. These provisions may have the effect of deferring,
delaying or discouraging hostile takeovers or changes in control
or management of our company.
Stockholder
Action by Written Consent
Pursuant to Section 228 of the DGCL any action required to
be taken at any annual or special meeting of the stockholders
may be taken without a meeting, without prior notice and without
a vote if a consent or consents in writing, setting forth the
action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares of our stock entitled to vote thereon were present
and voted, unless our amended and restated certificate of
incorporation provides otherwise. Our amended and restated
certificate of incorporation will provide that any action
required or permitted to be taken by our stockholders may be
effected at a duly called annual or special meeting of our
stockholders and may not be effected by consent in writing by
such stockholders, unless such action is recommended by all
directors then in office.
Section 203
of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the
DGCL. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a business
combination with an interested stockholder for
a three-year
140
period following the time that this stockholder becomes an
interested stockholder, unless the business combination is
approved in a prescribed manner. Under Section 203, a
business combination between a corporation and an interested
stockholder is prohibited unless it satisfies one of the
following conditions:
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before the stockholder became interested, our board of directors
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock
outstanding, shares owned by persons who are directors and also
officers, and employee stock plans, in some instances, but not
the outstanding voting stock owned by the interested
stockholder; or
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at or after the time the stockholder became interested, the
business combination was approved by our board of directors of
the corporation and authorized at an annual or special meeting
of the stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
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Section 203 defines a business combination to
include:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
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subject to exceptions, any transaction that results in the
issuance of transfer by the corporation of any stock of the
corporation to the interested stockholder;
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subject to exceptions, any transaction involving the corporation
that has the effect of increasing the proportionate share of the
stock of any class or series of the corporation beneficially
owned by the interested stockholder; and
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested
stockholder as any entity or person that beneficially
owns, or did own within three years prior to the determination
of interested stockholder status, 15% or more of the outstanding
voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by the entity or
person.
Requirements
for Amendments to our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws
Our amended and restated certificate of incorporation will
provide, among other things, that our amended and restated
bylaws may be adopted, amended, altered or repealed by
(i) the vote of a majority of directors then in office or
(ii) the vote of
662/3%
of holders of all of our outstanding capital stock entitled to
vote generally in the election of directors.
Our amended and restated certificate of incorporation will also
provide that the provisions of our amended and restated
certificate of incorporation relating to our classified board of
directors, requirements for advance notice and stockholder
action by written consent described above under the heading
-Antitakeover Effects of Delaware Law and Our Certificate
of Incorporation and Bylaws may only be amended, altered,
changed or repealed by the affirmative vote of the holders of at
least
662/3%
of the voting power of all of our outstanding shares of capital
stock entitled to vote generally in the election of directors.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock will
be .
141
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Future sales of substantial amounts of our common
stock in the public market, or the perception that such sales
may occur, could adversely affect the prevailing market price of
our common stock. No prediction can be made as to the effect, if
any, future sales of shares, or the availability of shares for
future sales, will have on the market price of our common stock
prevailing from time to time. The sale of substantial amounts of
our common stock in the public market, or the perception that
such sales could occur, could harm the prevailing market price
of our common stock.
Sale of
Restricted Shares
Upon completion of this offering, we will
have shares
of common stock outstanding. Of these shares of common stock,
the shares
of common stock being sold in this offering, plus any shares
sold upon exercise of the underwriters option to purchase
additional shares, will be freely tradable without restriction
under the Securities Act, except for any such shares which may
be held or acquired by an affiliate of ours, as that
term is defined in Rule 144 promulgated under the
Securities Act, which shares will be subject to the volume
limitations and other restrictions of Rule 144 described
below. The
remaining shares
of common stock held by our existing stockholders upon
completion of this offering will be restricted
securities, as that phrase is defined in Rule 144,
and may be resold only after registration under the Securities
Act or pursuant to an exemption from such registration,
including, among others, the exemptions provided by
Rule 144 and 701 under the Securities Act, which rules are
summarized below. These remaining shares of common stock held by
our existing stockholders upon completion of this offering will
be available for sale in the public market after the expiration
of the
lock-up
agreements described in Underwriting, taking into
account the provisions of Rules 144 and 701 under the
Securities Act.
Rule 144
In general, under Rule 144 as currently in effect, persons
who became the beneficial owner of shares of our common stock
prior to the completion of this offering may sell their shares
upon the earlier of (1) the expiration of a six-month
holding period, if we have been subject to the reporting
requirements of the Exchange Act for at least 90 days prior
to the date of the sale and have filed all reports required
thereunder, or (2) the expiration of a one-year holding
period. We believe that holders who acquired their common stock
in connection with the Recapitalization will be permitted to
tack the holding period of their Class A common
stock, Class B common stock or preferred stock to the
holding period of their common stock for purposes of
establishing these six-month or one-year holding periods.
At the expiration of the six-month holding period, assuming we
have been subject to the Exchange Act reporting requirements for
at least 90 days and have filed all reports required
thereunder, a person who was not one of our affiliates at any
time during the three months preceding a sale would be entitled
to sell an unlimited number of shares of our common stock, and a
person who was one of our affiliates at any time during the
three months preceding a sale would be entitled to sell, within
any three-month period, a number of shares of common stock that
does not exceed the greater of either of the following:
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1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after this offering; or
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the average weekly trading volume of our common stock on the
stock exchange on which it is listed during the four calendar
weeks preceding the filing of a notice on Form 144 with respect
to the sale.
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At the expiration of the one-year holding period, a person who
was not one of our affiliates at any time during the three
months preceding a sale would be entitled to sell an unlimited
number of shares of our common stock without restriction. A
person who was one of our affiliates at any time during the
three months preceding a sale would remain subject to the volume
restrictions described above.
Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
142
Rule 701
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who purchased
shares from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of
this offering, or who purchased shares from us after that date
upon the exercise of options granted before that date, are
eligible to resell such shares in reliance upon Rule 144
beginning 90 days after the date of this prospectus. If
such person is not an affiliate, the sale may be made subject
only to the
manner-of-sale
restrictions of Rule 144. If such a person is an affiliate,
the sale may be made under Rule 144 without compliance with
its one-year minimum holding period, but subject to the other
Rule 144 restrictions.
Registration
Rights
As described above in Certain Relationships and Related
Party Transactions Investor Rights Agreement,
following the completion of this offering, subject to the
180-day
lock-up
period described above, certain of our existing stockholders
will be entitled, subject to certain exceptions, to demand that
we register under the Securities Act all or any portion of their
shares. Following this offering, holders of an aggregate
of shares
will be entitled to demand that we register the shares of common
stock held by them. By exercising their registration rights and
causing a large number of shares to be registered and sold in
the public market, these holders could cause the price of the
common stock to fall. In addition, any demand to include such
shares in our registration statements could have a material
adverse effect on our ability to raise needed capital. We have
not granted any other holders of our securities any demand
registration rights other than pursuant to the Investor Rights
Agreement.
Stock
Plans
We intend to file one or more registration statements on
Form S-8
under the Securities Act to register shares of our common stock
issued or reserved for issuance under our existing option plan
and the new equity incentive plan we intend to adopt in
connection with this offering. The first such registration
statement is expected to be filed soon after the date of this
prospectus and will automatically become effective upon filing
with the SEC. Accordingly, shares registered under such
registration statement will be available for sale in the open
market following the effective date, unless such shares are
subject to vesting restrictions with us, Rule 144
restrictions applicable to our affiliates or the
lock-up
restrictions described below.
Lock-Up
Agreements
We and each of our directors and officers and certain
stockholders have agreed that, without the prior written consent
of Morgan Stanley & Co. LLC and J.P. Morgan
Securities LLP on behalf of the underwriters, we and they will
not (subject to certain exceptions), during the period ending
180 days after the date of this prospectus (subject to
certain extensions):
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any other securities convertible into
or exercisable or exchangeable for common stock; or
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock;
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whether any transaction described above is to be settled by
delivery of shares of our common stock or such other securities,
in cash or otherwise. For additional information, see
Underwriting.
143
MATERIAL
U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS TO
NON-U.S.
HOLDERS
The following is a summary of material U.S. federal income
and estate tax consequences of the purchase, ownership and
disposition of our common stock to a
non-U.S. holder
that purchases shares of our common stock in this offering. This
summary applies only to a
non-U.S. holder
that holds our common stock as a capital asset, within the
meaning of Section 1221 of the Code. For purposes of this
summary, a
non-U.S. holder
means any beneficial owner of our common stock other than:
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an individual citizen or resident of the United States, as
defined for federal income tax purposes;
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a corporation or other entity treated as a corporation for
U.S. federal income tax purposes created or organized in
the United States or under the laws of the United States or any
political subdivision thereof;
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an estate whose income is subject to U.S. federal income
tax regardless of its source; or
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a trust if it (1) is subject to the primary supervision of
a court within the United States and one or more United States
persons have the authority to control all substantial decisions
of the trust or (2) has a valid election in place to be
treated as a U.S. person for U.S. federal income tax
purposes.
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In the case of a holder that is classified as a partnership for
U.S. federal income tax purposes, the tax treatment of a
partner in such partnership generally will depend upon the
status of the partner and the activities of the partner and the
partnership. If you are a partner in a partnership holding our
common stock, then you should consult your own tax advisor.
This summary is based upon the provisions of the Code, the
Treasury regulations promulgated thereunder and administrative
and judicial interpretations thereof, all as of the date hereof.
Those authorities may be changed, perhaps retroactively, so as
to result in U.S. federal income tax consequences different
from those summarized below. We cannot assure you that a change
in law, possibly with retroactive application, will not alter
significantly the tax considerations that we describe in this
summary. We have not sought and do not plan to seek any ruling
from the U.S. Internal Revenue Service, or the
IRS, with respect to statements made and the
conclusions reached in the following summary, and there can be
no assurance that the IRS or a court will agree with our
statements and conclusions.
This summary does not address all aspects of U.S. federal
income taxes that may be relevant to
non-U.S. holders
in light of their personal circumstances, and does not deal with
federal taxes other than the U.S. federal income tax or
with
non-U.S.,
state or local tax considerations. Special rules, not discussed
here, may apply to certain
non-U.S. holders,
including:
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former citizens or residents of the U.S.;
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brokers or dealers in securities;
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persons who hold our common stock as a position in a
straddle, conversion transaction or
other risk reduction transaction;
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controlled foreign corporations, passive foreign investment
companies, or corporations that accumulate earnings to avoid
U.S. federal income tax;
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tax-exempt organizations;
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banks, insurance companies, or other financial
institutions; and
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investors in pass-through entities that are subject to special
treatment under the Code.
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Such
non-U.S. holders
should consult their own tax advisors to determine the
U.S. federal, state, local and other tax consequences that
may be relevant to them.
If you are considering the purchase of our common stock, you
should consult your own tax advisor concerning the particular
U.S. federal income tax consequences to you of the
purchase, ownership and disposition of our common stock, as well
as the consequences to you arising under U.S. tax laws
other than the federal income tax law or under the laws of any
other taxing jurisdiction.
144
Dividends
As discussed under the section entitled Dividend
Policy above, we do not currently anticipate paying
dividends. In the event that we do make a distribution of cash
or property (other than certain stock distributions) with
respect to our common stock (or certain redemptions that are
treated as distributions with respect to common stock), any such
distributions will be treated as a dividend for
U.S. federal income tax purposes to the extent paid from
our current or accumulated earnings and profits (as determined
under U.S. federal income tax principles). Dividends paid
to you generally will be subject to withholding of
U.S. federal income tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty. However,
dividends that are effectively connected with the conduct of a
trade or business by you within the U.S. and, where a tax
treaty applies, are generally attributable to a
U.S. permanent establishment, are not subject to the
withholding tax, but instead are subject to U.S. federal
income tax on a net income basis at applicable graduated
individual or corporate rates. Certain certification and
disclosure requirements including delivery of a properly
executed IRS
Form W-8ECI
must be satisfied for effectively connected income to be exempt
from withholding. Any such effectively connected dividends
received by a foreign corporation may be subject to an
additional branch profits tax at a 30% rate or such
lower rate as may be specified by an applicable income tax
treaty.
If the amount of a distribution paid on our common stock exceeds
our current and accumulated earnings and profits, such excess
will be allocated ratably among each share of common stock with
respect to which the distribution is paid and treated first as a
tax-free return of capital to the extent of your adjusted tax
basis in each such share, and thereafter as capital gain from a
sale or other disposition of such share of common stock that is
taxed to you as described below under the heading Gain on
Disposition of Common Stock. Your adjusted tax basis is
generally the purchase price of such shares, reduced by the
amount of any such tax-free returns of capital.
If you wish to claim the benefit of an applicable treaty rate to
avoid or reduce withholding of U.S. federal income tax for
dividends, then you must (a) provide the withholding agent
with a properly completed IRS
Form W-8BEN
(or other applicable form) and certify under penalties of
perjury that you are not a U.S. person and are eligible for
treaty benefits, or (b) if our common stock is held through
certain foreign intermediaries, satisfy the relevant
certification requirements of applicable U.S. Treasury
regulations. Special certification and other requirements apply
to certain
non-U.S. holders
that act as intermediaries (including partnerships).
If you are eligible for a reduced rate of U.S. federal
income tax pursuant to an income tax treaty, then you may obtain
a refund or credit of any excess amounts withheld by filing
timely an appropriate claim with the IRS.
Gain on
Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax with respect to gain realized on the sale or other taxable
disposition of our common stock, unless:
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the gain is effectively connected with a trade or business you
conduct in the U.S., and, in cases in which certain tax treaties
apply, is attributable to a U.S. permanent establishment;
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if you are an individual, you are present in the U.S. for
183 days or more in the taxable year of the sale or other
taxable disposition, and you have a tax home (as
defined in the Code) in the U.S.; or
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we are or have been during a specified testing period a
U.S. real property holding corporation for
U.S. federal income tax purposes, and certain other
conditions are met.
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We believe that we have not been and are not, and we do not
anticipate becoming, a U.S. real property holding
corporation for U.S. federal income tax purposes. If
you are an individual described in the first bullet point above,
you will be subject to tax on the net gain derived from the sale
under regular graduated U.S. federal income tax rates. If
you are an individual described in the second bullet point
above, you will be subject to a flat 30% tax on the gain derived
from the sale, which may be offset by U.S. source capital
losses (even though you are not considered a resident of the
U.S.) but may not be offset by any capital loss carryovers. If
you are a foreign corporation described in the first bullet
point above, you will be subject to tax on your gain under
regular graduated U.S. federal income tax rates and, in
addition, may be subject to the branch profits tax equal to 30%
of your effectively connected earnings and profits or at such
lower rate as may be specified by an applicable income tax
treaty.
145
Information
Reporting and Backup Withholding Tax
We must report annually to the IRS and to you the amount of
dividends paid to you and the amount of tax, if any, withheld
with respect to such dividends. The IRS may make this
information available to the tax authorities in the country in
which you are resident.
In addition, you may be subject to information reporting
requirements and backup withholding tax (currently at a rate of
28%) with respect to dividends paid on, and the proceeds of
disposition of, shares of our common stock, unless, generally,
you certify under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person or you otherwise establish
an exemption. Additional rules relating to information reporting
requirements and backup withholding tax with respect to payments
of the proceeds from the disposition of shares of our common
stock are as follows:
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If the proceeds are paid to or through the U.S. office of a
broker, the proceeds generally will be subject to backup
withholding tax and information reporting, unless you certify
under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person or you otherwise establish
an exemption.
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If the proceeds are paid to or through a
non-U.S. office
of a broker that is not a U.S. person and is not a foreign
person with certain specified U.S. connections, or a
U.S.-related
person, information reporting and backup withholding tax
generally will not apply.
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If the proceeds are paid to or through a
non-U.S. office
of a broker that is a U.S. person or a
U.S.-related
person, the proceeds generally will be subject to information
reporting (but not to backup withholding tax), unless you
certify under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person or you otherwise establish
an exemption.
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Any amounts withheld under the backup withholding tax rules may
be allowed as a refund or a credit against your
U.S. federal income tax liability, provided the required
information is timely furnished by you to the IRS.
Federal
Estate Tax
Common stock owned or treated as owned by an individual who is
not a citizen or resident (as defined for U.S. federal
estate tax purposes) of the United States at the time of his or
her death will be included in the individuals gross estate
for U.S. federal estate tax purposes and therefore may be
subject to U.S. federal estate tax unless an applicable
treaty provides otherwise.
New
Legislation Affecting Taxation of Common Stock Held By or
Through Foreign Entities
Recently enacted legislation generally will impose a withholding
tax of 30 percent on dividend income from our common stock
and the gross proceeds of a disposition of our common stock paid
to a foreign financial institution (as defined in
the legislation), unless such institution enters into an
agreement with the U.S. government to collect and provide
to the U.S. tax authorities substantial information
regarding U.S. account holders of such institution (which
would include certain equity and debt holders of such
institution, as well as certain account holders that are foreign
entities with U.S. owners). Absent any applicable
exception, this legislation also generally will impose a
withholding tax of 30 percent on dividend income from our
common stock and the gross proceeds of a disposition of our
common stock paid to a foreign entity that is not a foreign
financial institution unless such entity provides the
withholding agent with a certification identifying the
substantial U.S. owners of the entity, which generally
includes any U.S. person who directly or indirectly own
more than 10 percent of the entity. Under certain
circumstances, a
non-U.S. holder
of our common stock might be eligible for refunds or credits of
such taxes, and a
non-U.S. holder
might be required to file a U.S. federal income tax return
to claim such refunds or credits. This legislation generally is
effective for payments made after December 31, 2012.
Investors are encouraged to consult with their own tax advisors
regarding the implications of this legislation on their
investment in our common stock.
THE SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES ABOVE IS INCLUDED FOR GENERAL INFORMATION PURPOSES
ONLY. POTENTIAL PURCHASERS OF OUR COMMON STOCK ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
U.S. FEDERAL, STATE, LOCAL AND
NON-U.S. TAX
CONSIDERATIONS OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON
STOCK.
146
UNDERWRITING
We are offering the shares of common stock described in this
prospectus through a number of underwriters. Morgan
Stanley & Co. LLC, J.P. Morgan Securities LLC and
Barclays Capital Inc. are acting as joint book-running managers
of the offering and as representatives of the underwriters.
Subject to the terms and conditions of an underwriting agreement
among us and the underwriters dated the date of this prospectus,
we have agreed to sell to the underwriters the number of shares
indicated below:
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Name
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Number of Shares
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Morgan Stanley & Co. LLC
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J.P. Morgan Securities LLC
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Barclays Capital Inc.
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William Blair & Company, L.L.C.
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BMO Capital Markets Corp.
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Total
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The underwriters and the representatives are collectively
referred to as the underwriters and the
representatives, respectively. The underwriters are
offering the shares of common stock subject to their acceptance
of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the
shares of common stock offered by this prospectus are subject to
the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock offered by this
prospectus if any such shares are taken. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option
described below.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the offering price
listed on the cover page of this prospectus and part to certain
dealers (which may include the underwriters, at such offering
price less a selling concession not in excess of
$ per share). After the initial
offering of the shares of common stock, the offering price and
other selling terms may from time to time be varied by the
representatives.
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up
to
additional shares of common stock at the public offering price
listed on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the
option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase about the same
percentage of the additional shares of common stock as the
number listed next to the underwriters name in the
preceding table bears to the total number of shares of common
stock listed next to the names of all underwriters in the
preceding table.
The following table shows the per share and total public
offering price, underwriting discounts and commissions, and
proceeds before expenses to us. These amounts are shown assuming
both no exercise and full exercise of the underwriters
option to purchase up to an
additional shares
of common stock.
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Total
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Per
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No
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Full
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Share
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Exercise
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Exercise
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Public offering price
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$
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$
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$
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Underwriting discounts and commissions paid by us
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$
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$
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$
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Proceeds, before expenses, to us
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$
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$
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$
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The estimated offering expenses payable by us, exclusive of the
underwriting discounts and commissions, are approximately
$ .
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed 5% of the total number of
shares of common stock offered by them.
147
We intend to apply to list our common stock
on
under the proposed symbol
.
We have agreed that, without the prior written consent of Morgan
Stanley & Co. LLC and J.P. Morgan Securities LLC
on behalf of the underwriters, we will not, during the period
ending 180 days after the date of this prospectus, or the
restricted period:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any other securities convertible into
or exercisable or exchangeable for common stock;
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock; or
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file any registration statement with the Securities and Exchange
Commission relating to the offering of any shares of common
stock or any securities convertible into or exercisable or
exchangeable for common stock;
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whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise.
The restrictions described in the immediately preceding
paragraph do not apply to:
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the sale of shares to the underwriters;
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the issuance by us of shares of common stock upon the exercise
of an option or warrant or the conversion of a security
outstanding on the date of this prospectus to the extent
described herein;
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the issuance by us of options or other stock-based compensation
pursuant to equity compensation plans in existence on the date
of this prospectus and described herein, provided that the
recipient agrees to the same restrictions described in the
immediately preceding paragraph or, in the case of options, such
options do not become exercisable during the
180-day
restricted period or any extension thereof;
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the establishment of a trading plan pursuant to
Rule 10b5-1
under the Exchange Act for the transfer of shares of common
stock, provided that such plan does not provide for the transfer
of common stock during the restricted period and no public
announcement or filing under the Exchange Act regarding the
establishment of such plan shall be required or voluntarily
made; or
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the issuance by us of shares of common stock as consideration
for bona fide acquisitions, provided that the number of
shares issued or issuable shall not, in the aggregate, exceed
10% of the total number of shares of common stock outstanding
immediately following this offering (determined on a
fully-diluted basis) and, upon of receipt of such securities,
each recipient of such securities issued pursuant thereto
recipient agrees to be subject to the restrictions described in
the immediately preceding paragraph.
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Our directors and officers and certain holders of our
outstanding stock and stock options have agreed that, without
the prior written consent of Morgan Stanley & Co. LLC
and J.P. Morgan Securities LLC on behalf of the
underwriters, they will not, during the restricted period:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any other securities convertible into
or exercisable or exchangeable for common stock; or
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock;
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whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. In addition, each such person agrees that, without
the prior written consent of Morgan Stanley & Co. LLC
on behalf of the underwriters, it will not, during the
restricted period, make any demand for, or exercise any right
with respect to, the registration of any shares of common stock
or any security convertible into or exercisable or exchangeable
for common stock. To the extent any such person that is a party
to the Investor Rights
148
Agreement is released from any such restrictions during the
restricted period, then the remaining parties to the Investor
Rights Agreement shall be released from such restrictions in the
same proportion.
The restrictions described in the immediately preceding
paragraph do not apply to:
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the establishment of a trading plan pursuant to
Rule 10b5-1
under the Exchange Act for the transfer of shares of common
stock, provided that such plan does not provide for the transfer
of common stock during the restricted period and no public
announcement or filing under the Exchange Act regarding the
establishment of such plan shall be required or voluntarily made;
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transactions relating to shares of common stock or other
securities acquired in open market transactions after the
completion of this offering, provided that no filing under
Section 16(a) of the Exchange Act shall be required or
shall be voluntarily made in connection with subsequent sales of
common stock or other securities acquired in such open market
transactions;
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the exercise of any stock options pursuant to employee benefit
plans described herein or warrants held as of the date of this
offering in accordance with their terms;
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any transfer pursuant to a bona fide third party tender
offer, merger, consolidation or other similar transaction made
to all holders of our common stock involving a change of control
of the company, provided that in the event that the tender
offer, merger, consolidation or other such transaction is not
completed, the common stock will remain subject to the
restrictions described in the preceding paragraph;
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transfers of shares of common stock or any security convertible
into common stock as a bona fide gift or by will or intestacy;
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distributions of shares of common stock or any security
convertible into common stock to general or limited partners,
members or stockholders of the transferor or distributor;
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transfers by directors, officers and stockholders of shares of
common stock or any security convertible into common stock as a
bona fide gift to any trust for the direct or indirect benefit
of such transferee or the immediate family members of such
transferee;
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provided that in the case of any transfer or distribution
described in the last three bullet points above, each donee,
distributee, transferee and recipient agrees to be subject to
the restrictions described in the immediately preceding
paragraph and no filing under Section 16(a) of the Exchange
Act, reporting a reduction in beneficial ownership of shares of
common stock, shall be required or shall be voluntarily made
during the restricted period.
The restricted period will be extended if:
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during the last 17 days of the restricted period we issue
an earnings release or material news event relating to us
occurs, or
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prior to the expiration of the restricted period, we announce
that we will release earnings results during the
16-day
period beginning on the last day of the restricted period,
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in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over-allotment option. The underwriters may also sell
shares in excess of the over-allotment option, creating a naked
short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that
149
there may be downward pressure on the price of the common stock
in the open market after pricing that could adversely affect
investors who purchase in this offering. As an additional means
of facilitating this offering, the underwriters may bid for, and
purchase, shares of common stock in the open market to stabilize
the price of the common stock. These activities may raise or
maintain the market price of the common stock above independent
market levels or prevent or retard a decline in the market price
of the common stock. The underwriters are not required to engage
in these activities and may end any of these activities at any
time.
We and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the
Securities Act.
A prospectus in electronic format may be made available on
websites maintained by one or more underwriters, or selling
group members, if any, participating in this offering. The
representatives may agree to allocate a number of shares of
common stock to underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated by the
representatives to underwriters that may make Internet
distributions on the same basis as other allocations.
Pricing
of the Offering
Prior to this offering, there has been no public market for our
common stock. The initial public offering price was determined
by negotiations between us and the representatives. Among the
factors considered in determining the initial public offering
price were our future prospects and those of our industry in
general, our sales, earnings and certain other financial and
operating information in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities, and
certain financial and operating information of companies engaged
in activities similar to ours.
Directed
Share Program
At our request, the underwriters have
reserved shares
of common stock to be issued by us and offered by this
prospectus for sale, at the initial public offering price, to
our directors, officers, employees, business associates and
related persons. If purchased by these persons, these shares
will be subject to a
180-day
lock-up
restriction. The number of shares of common stock available for
sale to the general public will be reduced to the extent these
individuals purchase such reserved shares. Any reserved shares
that are not so purchased will be offered by the underwriters to
the general public on the same basis as the other shares offered
by this prospectus.
European
Economic Area
In relation to each member state of the European Economic Area
which has implemented the Prospectus Directive, each of which we
refer to as a Relevant Member State, including each Relevant
Member State that has implemented amendments to
Article 3(2) of the Prospectus Directive with regard to
persons to whom an offer of securities is addressed and the
denomination per unit of the offer of securities, each of which
we refer to as an Early Implementing Member State, with effect
from and including the date on which the Prospectus Directive is
implemented in that Relevant Member State, which we refer to as
the Relevant Implementation Date, no offer of shares of our
common stock offered hereby will be made in the Institutional
Offering to the public in that Relevant Member State (other than
offers, which we refer to as Permitted Public Offers where a
prospectus will be published in relation to the shares of our
common stock offered hereby that has been approved by the
competent authority in a Relevant Member State or, where
appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive), except
that with effect from and including that Relevant Implementation
Date, offers of shares of our common stock offered hereby may be
made to the public in that Relevant Member State at any time:
(a) to qualified investors, as defined in the
Prospectus Directive, including:
(i) (in the case of Relevant Member States other than Early
Implementing Member States), legal entities which are authorised
or regulated to operate in the financial markets or, if not so
authorised or regulated, whose corporate purpose is solely to
invest in securities, or any legal entity which has two or more
of (i) an average of
150
at least 250 employees during the last financial year;
(ii) a total balance sheet of more than
43.0 million and (iii) an annual turnover of
more than 50.0 million as shown in its last annual or
consolidated accounts; or
(ii) (in the case of Early Implementing Member States),
persons or entities that are described in points (1) to
(4) of Section I of Annex II to Directive
2004/39/EC, and those who are treated on request as professional
clients in accordance with Annex II to Directive
2004/39/EC, or recognised as eligible counterparties in
accordance with Article 24 of Directive 2004/39/EC unless
they have requested that they be treated as non-professional
clients; or
(b) to fewer than 100 (or, in the case of Early
Implementing Member States, 150) natural or legal persons
(other than qualified investors as defined in the
Prospectus Directive) subject to obtaining the prior consent of
the Subscribers; or
(c) in any other circumstances falling within
Article 3(2) of the Prospectus Directive, provided that no
such offer of shares of our common stock offered hereby shall
result in a requirement for the publication of a prospectus
pursuant to Article 3 of the Prospectus Directive or of a
supplement to a prospectus pursuant to Article 16 of the
Prospectus Directive.
Each person in a Relevant Member State (other than a Relevant
Member State where there is a Permitted Public Offer) who
initially acquires any shares of our common stock offered hereby
or to whom any offer is made under the Institutional Offering
will be deemed to have represented, acknowledged and agreed to
and with each Subscriber and the Bank that (A) it is a
qualified investor, and (B) in the case of any
shares of our common stock offered hereby acquired by it as a
financial intermediary, as that term is used in
Article 3(2) of the Prospectus Directive, (x) the
shares of our common stock offered hereby acquired by it in the
Institutional Offering have not been acquired on behalf of, nor
have they been acquired with a view to their offer or resale to,
persons in any Relevant Member State other than qualified
investors as defined in the Prospectus Directive, or in
circumstances in which the prior consent of the Subscribers has
been given to the offer or resale, or (y) where shares of
our common stock offered hereby have been acquired by it on
behalf of persons in any Relevant Member State other than
qualified investors as defined in the Prospectus
Directive, the offer of those shares to it is not treated under
the Prospectus Directive as having been made to such persons.
For the purpose of the above provisions, the expression an
offer to the public in relation to any shares of our
common stock offered hereby in any Relevant Member State means
the communication in any form and by any means of sufficient
information on the terms of the offer of any such shares to be
offered so as to enable an investor to decide to purchase any
such shares, as the same may be varied in the Relevant Member
State by any measure implementing the Prospectus Directive in
the Relevant Member State and the expression Prospectus
Directive means Directive 2003/71 EC (including that
Directive as amended, in the case of Early Implementing Member
States) and includes any relevant implementing measure in each
Relevant Member State.
United
Kingdom
This Prospectus is only being distributed to, and is only
directed at, persons in the United Kingdom that are qualified
investors within the meaning of Article 2(1)(e) of the
Prospectus Directive that are also (i) investment
professionals falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005,
or the Order or (ii) high net worth entities,
and other persons to whom it may lawfully be communicated,
falling within Article 49(2)(a) to (d) of the Order,
or each such person being referred to as a relevant
person. This Prospectus and its contents are confidential
and should not be distributed, published or reproduced (in whole
or in part) or disclosed by recipients to any other persons in
the United Kingdom. Any person in the United Kingdom that is not
a relevant person should not act or rely on this Prospectus or
any of its contents.
Switzerland
The shares of common stock may not be publicly offered in
Switzerland and will not be listed on the SIX Swiss Exchange, or
SIX, or on any other stock exchange or regulated
trading facility in Switzerland. This document has been prepared
without regard to the disclosure standards for issuance
prospectuses under art. 652a or art. 1156 of the Swiss Code of
Obligations or the disclosure standards for listing prospectuses
under art. 27 ff. of the SIX Listing
151
Rules or the listing rules of any other stock exchange or
regulated trading facility in Switzerland. Neither this document
nor any other offering or marketing material relating to the
Shares or the offering may be publicly distributed or otherwise
made publicly available in Switzerland.
Neither this document nor any other offering or marketing
material relating to the offering, the Issuer, or the common
stock have been or will be filed with or approved by any Swiss
regulatory authority. In particular, this document will not be
filed with, and the offer of common stock will not be supervised
by, the Swiss Financial Market Supervisory Authority FINMA
(FINMA), and the offer of common stock has not been and will not
be authorized under the Swiss Federal Act on Collective
Investment Schemes, or CISA. The investor protection
afforded to acquirers of interests in collective investment
schemes under the CISA does not extend to acquirers of Shares.
Dubai
International Financial Centre
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority, or DFSA. This document is intended for
distribution only to persons of a type specified in the Offered
Securities Rules of the DFSA. It must not be delivered to, or
relied on by, any other person. The DFSA has no responsibility
for reviewing or verifying any documents in connection with
exempt offers. The DFSA has not approved this document nor taken
steps to verify the information set forth herein and has no
responsibility for this document. The securities to which this
prospectus relates may be illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the securities offered should conduct their own due diligence
on the securities. If you do not understand the contents of this
document you should consult an authorized financial advisor.
Other
Relationships
Certain of the underwriters and their respective affiliates may
in the future perform various financial advisory services for
us. In addition, we have customer agreements with certain
affiliates of the underwriters and such financial institutions
are increasingly requiring certain of their customers to enter
into customer agreements with us.
William Blair & Company, L.L.C. is one of the
underwriters of this offering. Mr. Richard P. Kiphart, who
is head of William Blair & Company, L.L.C.s
Private Client Advisors and a member of the firms
executive committee, is one of our directors and, upon
completion of this offering, will own
approximately shares,
or % of our outstanding common stock. In
addition, members of Mr. Kipharts immediate family
will beneficially
own shares,
or % of our outstanding common stock upon
completion of this offering. William Blair Capital Partners VII
QP, L.P. and William Blair Capital Partners VII, L.P. will hold
an aggregate
of shares,
or %, of our common stock upon
completion of this offering.
152
LEGAL
MATTERS
The validity of the common stock offered hereby will be passed
upon for us by Kirkland & Ellis LLP (a partnership
that includes professional corporations), Chicago, Illinois.
Certain legal matters will be passed upon for the underwriters
by Sidley Austin LLP, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Trustwave Holdings,
Inc. as of December 31, 2009 and 2010, and for each of the
three years in the period ended December 31, 2010, included
in this prospectus has been so included in reliance on the
report of PricewaterhouseCoopers LLP, an independent registered
public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of Intellitactics and
subsidiary as of December 31, 2008 and 2009 and
February 28, 2010, and for each of the two years in the
period ended December 31, 2009 and the two months in the
period ended February 28, 2010, included in this prospectus
and elsewhere in the registration statement have been so
included in reliance on the report of Grant Thornton LLP, an
independent registered public accounting firm, upon on the
authority of said firm as experts in auditing and accounting in
giving said report.
The consolidated financial statements of Breach Security as of
December 31, 2008 and 2009, and for each of the two years
in the period ended December 31, 2009, appearing in this
prospectus have been so included in reliance on the report of
Mayer Hoffman McCann P.C., an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
The financial statements of BitArmor as of December 31,
2008 and 2009, and for each of the two years in the period ended
December 31, 2009, appearing in this prospectus have been
so included in reliance on the report of Alpern Rosenthal, an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Vericept as of December 31,
2008 and 2009, and for the one year period ended
December 31, 2008 and the period from January 1, 2009
to August 25, 2009, appearing in this prospectus have been
so included in reliance on the report of Ehrhardt Keefe
Steiner & Hottman PC, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act that registers the shares of our common
stock to be sold in this offering. The registration statement,
including the attached exhibits, contains additional relevant
information about us and our common stock. The rules and
regulations of the SEC allow us to omit from this document
certain information included in the registration statement.
You may read and copy the reports and other information we file
with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may also obtain copies of this
information by mail from the public reference section of the
SEC, 100 F Street, N.E., Washington, D.C. 20549,
at prescribed rates. You may obtain information regarding the
operation of the public reference room by calling
1-800-SEC-0330.
The SEC also maintains a website that contains reports, proxy
statements and other information about issuers, like us, who
file electronically with the SEC. The address of that website is
http://www.sec.gov.
This reference to the SECs website is an inactive textual
reference only and is not a hyperlink.
Upon completion of this offering, we will become subject to the
reporting, proxy and information requirements of the Exchange
Act, and as a result will be required to file periodic reports,
proxy statements and other information with the SEC. These
periodic reports, proxy statements and other information will be
available for inspection and copying at the SECs public
reference room and the website of the SEC referred to above, as
well as on our website, www.trustwave.com. This reference to our
website is an inactive textual reference only and is not a
hyperlink. The contents of our website are not part of this
prospectus, and you should not consider the contents of our
website in making an investment decision with respect to our
common stock.
We intend to furnish our stockholders with annual reports
containing audited financial statements and make available to
our stockholders quarterly reports for the first three quarters
of each fiscal year containing unaudited interim financial
information.
153
INDEX TO
FINANCIAL STATEMENTS
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Audited Financial Statements of Trustwave Holdings, Inc.
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F-2
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F-3
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|
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|
|
F-4
|
|
|
|
|
F-5
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|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Unaudited Financial Statements of Trustwave Holdings, Inc.
|
|
|
|
|
|
|
|
F-35
|
|
|
|
|
F-36
|
|
|
|
|
F-37
|
|
|
|
|
F-38
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|
|
|
|
F-39
|
|
Audited Financial Statements of Intellitactics, Inc.
|
|
|
|
|
|
|
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F-49
|
|
|
|
|
F-50
|
|
|
|
|
F-51
|
|
|
|
|
F-52
|
|
|
|
|
F-53
|
|
|
|
|
F-54
|
|
Unaudited Financial Statements of Breach Security, Inc.
|
|
|
|
|
|
|
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F-68
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|
|
|
|
F-69
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|
|
|
|
F-70
|
|
|
|
|
F-71
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|
Audited Financial Statements of Breach Security, Inc.
|
|
|
|
|
|
|
|
F-79
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|
|
|
|
F-80
|
|
|
|
|
F-81
|
|
|
|
|
F-82
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|
|
|
|
F-83
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|
|
|
|
F-84
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|
Financial Statements of BitArmor Systems, Inc.
|
|
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F-97
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|
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F-98
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|
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|
|
F-99
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|
|
|
|
F-100
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|
|
|
|
F-102
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|
|
|
|
F-103
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|
Audited Financial Statements of Vericept Corporation
|
|
|
|
|
|
|
|
F-113
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|
|
|
|
F-114
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|
|
|
|
F-115
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|
|
|
|
F-116
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|
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|
F-117
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|
|
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|
F-118
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|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Trustwave Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity and cash flows present fairly, in all
material respects, the financial position of Trustwave Holdings,
Inc. and its subsidiaries at December 31, 2010 and 2009 and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for revenue in 2010 and the manner in which it accounts for
business combinations in 2009.
/s/ PricewaterhouseCoopers
LLP
Chicago, Illinois
April 21, 2011, except for Note 16 as to which the
date is June 2, 2011
F-2
TRUSTWAVE
HOLDINGS, INC.
December
31, 2009 and 2010
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|
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|
|
|
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2009
|
|
|
2010
|
|
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|
(in thousands,
|
|
|
|
except share and
|
|
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per share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,916
|
|
|
$
|
14,558
|
|
Accounts receivable, net
|
|
|
16,621
|
|
|
|
32,099
|
|
Inventories
|
|
|
482
|
|
|
|
488
|
|
Income tax receivable
|
|
|
72
|
|
|
|
|
|
Deferred tax asset, current
|
|
|
752
|
|
|
|
1,539
|
|
Prepaid expenses and other
|
|
|
1,509
|
|
|
|
3,542
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
43,352
|
|
|
|
52,226
|
|
Property and equipment, net
|
|
|
7,776
|
|
|
|
10,226
|
|
Intangible assets, net
|
|
|
7,165
|
|
|
|
17,488
|
|
Goodwill
|
|
|
28,281
|
|
|
|
42,050
|
|
Other assets
|
|
|
101
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
86,675
|
|
|
$
|
122,068
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,396
|
|
|
$
|
1,775
|
|
Deferred revenue, current
|
|
|
21,619
|
|
|
|
34,033
|
|
Accrued wages and payroll related
|
|
|
6,155
|
|
|
|
10,057
|
|
Note payable, current
|
|
|
1,000
|
|
|
|
|
|
Capital lease obligations, current
|
|
|
428
|
|
|
|
450
|
|
Income tax payable
|
|
|
|
|
|
|
182
|
|
Accrued expenses and other
|
|
|
3,095
|
|
|
|
5,473
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
33,693
|
|
|
|
51,970
|
|
Deferred revenue
|
|
|
14,875
|
|
|
|
8,349
|
|
Capital lease obligations
|
|
|
633
|
|
|
|
320
|
|
Deferred tax liabilities
|
|
|
734
|
|
|
|
1,465
|
|
Other long term liabilities
|
|
|
1,924
|
|
|
|
2,327
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
51,859
|
|
|
|
64,431
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities (see Note 18)
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred stock
|
|
|
|
|
|
|
|
|
Series A-1,
$0.0001 par value, 10,952,633 shares authorized;
10,952,633 shares issued and outstanding at
December 31, 2009 and 2010
|
|
|
13,041
|
|
|
|
13,541
|
|
Series A-2,
$0.0001 par value, 11,505,258 shares authorized;
11,505,258 issued and outstanding at December 31, 2009 and
2010
|
|
|
7,393
|
|
|
|
7,893
|
|
|
|
|
|
|
|
|
|
|
Total convertible redeemable preferred stock
|
|
|
20,434
|
|
|
|
21,434
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Series B Convertible Preferred Stock, $0.0001 par
value, 5,882,353 shares authorized; 5,882,351 issued and
outstanding at December 31, 2009 and 2010
|
|
|
10,000
|
|
|
|
10,000
|
|
Class B convertible common stock, $0.0001 par value,
6,174,654 shares authorized; issued and outstanding:
2,934,847 and 3,233,288 at December 31, 2009 and 2010
|
|
|
|
|
|
|
|
|
Class A common stock, $0.0001 par value, 125,175,210
and 144,175,210 shares authorized; issued and outstanding:
74,435,719 and 91,353,635 at December 31, 2009 and 2010
|
|
|
7
|
|
|
|
9
|
|
Additional paid-in capital
|
|
|
24,696
|
|
|
|
50,501
|
|
Accumulated deficit
|
|
|
(19,525
|
)
|
|
|
(24,147
|
)
|
Accumulated other comprehensive loss
|
|
|
(796
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
14,382
|
|
|
|
36,203
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible redeemable preferred stock, and
stockholders equity
|
|
$
|
86,675
|
|
|
$
|
122,068
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
TRUSTWAVE
HOLDINGS, INC.
Years Ended December 31, 2008, 2009,
and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands, except share and
|
|
|
|
per share data)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
44,356
|
|
|
$
|
56,708
|
|
|
$
|
81,677
|
|
Professional services
|
|
|
13,219
|
|
|
|
15,056
|
|
|
|
19,639
|
|
Product sales
|
|
|
753
|
|
|
|
1,343
|
|
|
|
10,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
58,328
|
|
|
|
73,107
|
|
|
|
111,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
|
22,525
|
|
|
|
26,431
|
|
|
|
33,415
|
|
Product sales, excluding depreciation and amortization
|
|
|
440
|
|
|
|
481
|
|
|
|
1,715
|
|
Depreciation and amortization
|
|
|
591
|
|
|
|
718
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
23,556
|
|
|
|
27,630
|
|
|
|
36,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
34,772
|
|
|
|
45,477
|
|
|
|
74,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
6,749
|
|
|
|
9,146
|
|
|
|
20,112
|
|
Sales and marketing
|
|
|
14,059
|
|
|
|
17,388
|
|
|
|
29,264
|
|
General and administrative
|
|
|
16,030
|
|
|
|
20,511
|
|
|
|
29,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
36,838
|
|
|
|
47,045
|
|
|
|
78,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,066
|
)
|
|
|
(1,568
|
)
|
|
|
(4,008
|
)
|
Interest expense, net
|
|
|
(151
|
)
|
|
|
(112
|
)
|
|
|
(87
|
)
|
Other income (loss), net
|
|
|
193
|
|
|
|
(304
|
)
|
|
|
(155
|
)
|
Gain on acquisition
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,024
|
)
|
|
|
(1,432
|
)
|
|
|
(4,250
|
)
|
Income tax expense
|
|
|
(22
|
)
|
|
|
(114
|
)
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,046
|
)
|
|
$
|
(1,546
|
)
|
|
$
|
(4,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative annual preferred dividends
|
|
|
(1,441
|
)
|
|
|
(1,800
|
)
|
|
|
(1,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(3,487
|
)
|
|
$
|
(3,346
|
)
|
|
$
|
(6,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
69,100,346
|
|
|
|
71,339,985
|
|
|
|
86,721,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per common share (unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted weighted average common shares
outstanding (unaudited)
|
|
|
|
|
|
|
|
|
|
|
117,449,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
TRUSTWAVE
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 2008, 2009, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series B
|
|
|
Class B
|
|
|
Class A
|
|
|
Series B
|
|
|
Class B
|
|
|
Class A
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Balance at January 1, 2008
|
|
|
|
|
|
|
1,897
|
|
|
|
68,626
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
21,863
|
|
|
$
|
(15,933
|
)
|
|
$
|
(23
|
)
|
|
$
|
5,914
|
|
Acquisition of ControlPath
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
Grants to outside advisors
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Exercise of stock options
|
|
|
|
|
|
|
86
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
Issuance of Series B preferred stock
|
|
|
5,882
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Accrued dividends on Series A-1 and A-2 preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
Compensation expense associated with stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
246
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,046
|
)
|
|
|
|
|
|
|
(2,046
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(696
|
)
|
|
|
(696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
5,882
|
|
|
|
1,983
|
|
|
|
69,688
|
|
|
|
10,000
|
|
|
|
|
|
|
|
7
|
|
|
|
21,536
|
|
|
|
(17,979
|
)
|
|
|
(719
|
)
|
|
|
12,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Vericept
|
|
|
|
|
|
|
|
|
|
|
4,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
3,747
|
|
Exercise of stock options
|
|
|
|
|
|
|
952
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
135
|
|
Accrued dividends on Series A-1 and A-2 preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
Compensation expense associated with stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,546
|
)
|
|
|
|
|
|
|
(1,546
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
5,882
|
|
|
|
2,935
|
|
|
|
74,436
|
|
|
|
10,000
|
|
|
|
|
|
|
|
7
|
|
|
|
24,696
|
|
|
|
(19,525
|
)
|
|
|
(796
|
)
|
|
|
14,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of BitArmor
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,450
|
|
|
|
|
|
|
|
|
|
|
|
3,450
|
|
Acquisition of Intellitactics
|
|
|
|
|
|
|
|
|
|
|
6,229
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
7,063
|
|
|
|
|
|
|
|
|
|
|
|
7,064
|
|
Acquisition of Breach
|
|
|
|
|
|
|
|
|
|
|
7,400
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
15,169
|
|
|
|
|
|
|
|
|
|
|
|
15,170
|
|
Exercise of stock options
|
|
|
|
|
|
|
298
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
Accrued dividends on Series A-1 and A-2 preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
Compensation expense associated with stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
1,026
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,622
|
)
|
|
|
|
|
|
|
(4,622
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
636
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
5,882
|
|
|
|
3,233
|
|
|
|
91,354
|
|
|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
50,501
|
|
|
$
|
(24,147
|
)
|
|
$
|
(160
|
)
|
|
$
|
36,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
TRUSTWAVE
HOLDINGS, INC.
Years Ended December 31, 2008,
2009, and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,046
|
)
|
|
$
|
(1,546
|
)
|
|
$
|
(4,622
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,136
|
|
|
|
3,012
|
|
|
|
4,970
|
|
Provision for doubtful accounts
|
|
|
417
|
|
|
|
662
|
|
|
|
1,476
|
|
Loss from disposal of property and equipment
|
|
|
|
|
|
|
65
|
|
|
|
191
|
|
Inventory provision
|
|
|
|
|
|
|
|
|
|
|
169
|
|
Gain on acquisition
|
|
|
|
|
|
|
(552
|
)
|
|
|
|
|
Non-cash compensation expense
|
|
|
285
|
|
|
|
278
|
|
|
|
1,026
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(4,866
|
)
|
|
|
(798
|
)
|
|
|
(12,948
|
)
|
(Increase) decrease in prepaid expenses and other current assets
|
|
|
(606
|
)
|
|
|
222
|
|
|
|
(1,168
|
)
|
(Increase) decrease in inventories
|
|
|
1
|
|
|
|
(152
|
)
|
|
|
(89
|
)
|
(Increase) decrease in other assets
|
|
|
34
|
|
|
|
44
|
|
|
|
60
|
|
(Increase) decrease in deferred taxes
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(24
|
)
|
Decrease in accounts payable
|
|
|
(845
|
)
|
|
|
(649
|
)
|
|
|
(1,303
|
)
|
Increase (decrease) in income taxes payable
|
|
|
9
|
|
|
|
187
|
|
|
|
253
|
|
Increase (decrease) in accrued expenses
|
|
|
2,135
|
|
|
|
(3,926
|
)
|
|
|
2,401
|
|
Increase (decrease) in other long-term liabilities
|
|
|
(150
|
)
|
|
|
1,924
|
|
|
|
403
|
|
Increase (decrease) in deferred revenue
|
|
|
4,176
|
|
|
|
22,181
|
|
|
|
(1,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
671
|
|
|
|
20,943
|
|
|
|
(10,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,786
|
)
|
|
|
(2,743
|
)
|
|
|
(4,273
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(440
|
)
|
|
|
451
|
|
|
|
12,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(2,226
|
)
|
|
|
(2,292
|
)
|
|
|
8,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(3,450
|
)
|
|
|
(1,083
|
)
|
|
|
(7,279
|
)
|
Payments on capital lease obligations
|
|
|
(75
|
)
|
|
|
(217
|
)
|
|
|
(313
|
)
|
Proceeds from issuance of convertible preferred stock
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock options
|
|
|
193
|
|
|
|
135
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
6,668
|
|
|
|
(1,165
|
)
|
|
|
(7,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates on cash flows
|
|
|
40
|
|
|
|
(164
|
)
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,153
|
|
|
|
17,322
|
|
|
|
(9,358
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
1,441
|
|
|
|
6,594
|
|
|
|
23,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
6,594
|
|
|
$
|
23,916
|
|
|
$
|
14,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
222
|
|
|
|
151
|
|
|
|
87
|
|
Cash paid for income taxes
|
|
|
19
|
|
|
|
(87
|
)
|
|
|
122
|
|
Supplemental disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment under capital leases
|
|
|
524
|
|
|
|
809
|
|
|
|
167
|
|
Issuance of stock and stock options in acquisitions of businesses
|
|
|
195
|
|
|
|
3,747
|
|
|
|
25,682
|
|
Notes payable and capital leases assumed in business combinations
|
|
|
|
|
|
|
|
|
|
|
6,299
|
|
Acquisition of leasehold improvements through landlord
reimbursements
|
|
|
|
|
|
|
734
|
|
|
|
575
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
|
|
1.
|
Nature of
Operations and Summary of Significant Accounting
Policies
|
Nature
of Operations
Trustwave is a leading provider of on-demand data security
compliance solutions that enable businesses and other
organizations of all sizes to efficiently achieve and maintain
compliance with regulatory requirements and industry standards.
The Companys compliance management solutions, including
its easy-to-use software-as-a-service
TrustKeeper®
offering, have helped hundreds of thousands of organizations
simplify the complex process of validating compliance.
Additionally, the Companys broad suite of compliance
enablement solutions remediates data security deficiencies,
allowing its customers to achieve and maintain compliance in a
cost effective manner. These solutions assist the Companys
subscribers in comprehensively securing their network
infrastructure, data communications and sensitive information
assets, protecting them against the increasing threats of
unauthorized access, fraudulent activity and other intrusions or
breaches. The Company has been successful in rapidly expanding
its customer base across a broad range of industries as a result
of our differentiated partner network, which is comprised of
many of the worlds largest financial institutions and
other organizations influential to the compliance and data
security mandates of their customers.
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of Trustwave and its wholly-owned subsidiaries TW
Breach, Inc., Trustwave Do Brasil Segurança Da
Informação e Conformidade, Trustwave Holdings, Ltd,
Trustwave Pte. Ltd., TW Vericept Corporation, hereinafter
referred to as the Company. Significant intercompany accounts
and transactions have been eliminated. The Company has included
the results of operations of acquired companies from their dates
of acquisition.
The consolidated financial statements and accompanying notes are
prepared in accordance with accounting principles generally
accepted in the United States of America. For purposes of
reporting under accounting principles generally accepted in the
United States of America, the Company has determined that the
U.S. dollar is its reporting currency.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles (GAAP)
requires management to make estimates and judgments that affect
the reported amounts of assets and liabilities and the
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. On an ongoing basis,
management evaluates these estimates, including those related to
the allowance for doubtful accounts, useful lives of long-lived
assets, goodwill and indefinite-lived intangible assets,
stock-based compensation, deferred taxes, commitments and
contingencies and litigation, among others. Management bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates.
Recent
Accounting Pronouncements
In December 2010, the FASB provided clarification regarding the
acquisition date that should be used for reporting pro forma
financial information disclosures required by Topic 805 when
comparative financial statements are presented. This guidance
also required entities to provide a description of the nature
and amount of material, nonrecurring pro forma adjustments that
are directly attributable to the business combination.
F-7
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Revenue
Recognition
The Company has three types of revenue: (i) subscription
revenue, (ii) professional services revenue, and
(iii) product revenue.
Subscription revenue. Subscription revenue
includes compliance management and compliance enablement
solutions sold under subscription arrangements, as well as
revenue from software license and appliance maintenance
agreements.
Professional services. Services revenue
includes consulting, implementation, training and other services.
Product revenue. Product revenue includes
perpetual software licenses and related hardware for Security
Information and Event Management (SIEM), web
application firewall technology (WAF), and Network
Access Control (NAC).
Revenue is recognized when all of the following four criteria
are met: persuasive evidence of an arrangement exists, service
has been rendered or delivery has occurred, the price is fixed
or determinable, and collectability is reasonably assured. If
the Company determines that any one of the four criteria is not
met, revenue recognition will be deferred until all the criteria
are met. Revenues related to subscription contracts are
recognized ratably over service, maintenance or subscription
period, which vary from one to five year terms. Revenues from
professional services are recognized at the time the service is
performed. Revenues from the sale of perpetual software licenses
and related hardware are recognized upon delivery, assuming all
other conditions for revenue recognition noted above have been
met.
The Company records deferred revenue when it receives payments
in advance of delivery of products or the performance of
services.
The Company does not issue refunds during the normal course of
business.
Revenue
Arrangements with Multiple Deliverables
Arrangements with customers may include multiple deliverables,
including any combination of products, equipment, services and
software. For these arrangements the deliverables are separate
units of accounting and the related revenue is recognized as
each unit meets the revenue recognition criteria. Units of
accounting are elements that (i) have value to the customer
on a stand-alone basis, and (ii) delivery of the
undelivered element(s) is probable and substantially in the
control of the Company.
In October 2009, the Financial Accounting Standards Board
(FASB) issued new guidance which amended the
accounting standards for revenue arrangements with multiple
deliverables. The new guidance changes the criteria required to
separate deliverables into separate units of accounting when
they are sold in a bundled arrangement and requires an entity to
allocate an arrangements consideration based on its
relative selling price. The new guidance also eliminates the use
of the residual method to allocate an arrangements
consideration. The Company elected to early adopt this guidance,
on a prospective basis for applicable arrangements entered into,
or materially modified, after January 1, 2010.
In October 2009, the FASB also issued new guidance for tangible
products containing software components and non-software
components that function together to deliver the tangible
products essential functionality. This guidance is
effective for fiscal years beginning on or after June 15,
2010 for revenue arrangements entered into, or materially
modified. The standards permit prospective or retrospective
adoption as well as early adoption. The Company elected to early
adopt this guidance, on a prospective basis for applicable
arrangements entered into, or materially modified, after
January 1, 2010.
Under the standards discussed above, the Company allocates
revenue to each element based on their relative selling price.
The Company uses a hierarchy to determine the selling price to
be used for allocating revenue to
F-8
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
deliverables: (i) vendor specific objective evidence of
fair value (VSOE), (ii) third-party evidence of
selling price (TPE) and (iii) best estimate of
the selling price (BESP).
VSOE is the price the Company sells the deliverable for
separately. VSOE exists for professional services and certain
maintenance offerings based on stand-alone sales of these
elements. TPE is based upon competitor prices for similar
deliverables when sold separately. The Company has not
identified relevant TPE for its products. The selling price used
for each deliverable is based on BESP if VSOE and TPE are not
available. It represents the Companys best estimate of
what the selling price of what an element would be if it were
sold regularly on a stand-alone basis. Determining BESP requires
significant judgment. The Company determines BESP for a product
or service by considering multiple factors including, but not
limited to, geographies, market conditions, customer-specific
factors, gross margin objectives and pricing practices.
Under the historical accounting principles, the Company was
required to account for hardware sales embedded with software
under the software revenue recognition guidance. For those sales
that included maintenance for which VSOE did not exist, the
revenue was deferred and recognized ratably over the maintenance
period.
The new accounting guidance requires the Company to account for
the sale of these products as two deliverables. The first
deliverable is the hardware, including software considered
essential to the functionality of the hardware, and the second
deliverable is the maintenance. The new accounting guidance
results in the recognition of more of the revenue and appliance
costs at the time of their sale.
The majority of the impact of the new accounting standard
relates to the ability to recognize revenue on a hardware
appliance upon delivery. Under the prior guidance, this revenue
was recognized over the related maintenance period. The impact
on the Companys consolidated statements of operations of
adopting this new accounting standard was as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2010
|
|
Increase in revenue
|
|
$
|
609
|
|
Increase in cost of sales
|
|
$
|
(120
|
)
|
Decrease to loss before income taxes
|
|
$
|
489
|
|
Decrease to net loss
|
|
$
|
489
|
|
The Companys arrangements with multiple deliverables may
also contain a stand-alone software deliverable which is subject
to the software revenue recognition guidance. The revenue for
these multiple-element arrangements is allocated to the software
deliverable and the non-software deliverable(s) based on the
relative selling prices of all of the deliverables in the
arrangement.
For software deliverables revenue is allocated to the
deliverables based on VSOE. Should VSOE not exist for the
undelivered software element, revenue is deferred until either
the undelivered element is delivered or VSOE is established for
the element, whichever occurs first. When the fair value of a
delivered software element has not been established, and fair
value exists for the undelivered elements, the Company uses the
residual method to recognize revenue. Under the residual method,
the fair value of the undelivered elements is deferred and the
remaining revenue is allocated to the delivered elements.
Cash
and Cash Equivalents
Cash and cash equivalents include cash and short-term highly
liquid investments with original maturities of three months or
less. Cash and cash equivalents are stated at cost which
approximates fair value. The Company deposits cash and cash
equivalents with financial institutions that management believes
are of high credit quality.
F-9
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Cash equivalents which consist primarily of deposits in money
market funds were $178 and $758 as of December 31, 2009 and
2010, respectively.
Fair
Value of Financial Instruments
The carrying amounts of the Companys financial
instruments, which include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are carried at
cost which approximate their fair values due to their short
maturities. Based on borrowing rates currently available to the
Company for loans with similar terms, the carrying values of
notes payable and capital lease obligations approximate fair
values.
The Company applies the following fair value hierarchy, which
prioritizes the inputs used to measure fair value into three
levels and bases the categorization within the hierarchy upon
the lowest level of input that is available and significant to
the fair value measurement:
|
|
|
|
|
Level 1: Observable inputs that
reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
|
|
|
|
Level 2: Inputs reflect quoted
prices for identical assets or liabilities in markets that are
not active; quoted prices for similar assets or liabilities in
active markets; inputs other than quoted prices that are
observable for the assets or liabilities; or inputs that are
derived principally from or corroborated by observable market
data by correlation or other means.
|
|
|
|
Level 3: Unobservable inputs
reflecting the Companys own assumptions incorporated in
valuation techniques used to determine fair value. These
assumptions are required to be consistent with market
participant assumptions that are reasonably available.
|
All of the Companys financial instruments meet the
criteria for Level 1 classification.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist principally of
cash, cash equivalents and accounts receivable.
The Company primarily places its temporary cash investments with
high-credit quality financial institutions which invest
predominantly in high-grade securities. Deposits of cash outside
the United States were $1,584 and $4,301 as of December 31,
2009 and 2010, respectively.
The Company derives its accounts receivable from revenues earned
from customers located in the U.S. and other locations outside
the U.S. The Company performs credit evaluations of its
substantial customers financial condition to reduce credit
risk and, generally requires no collateral from its customers.
The Company maintains an allowance for potential credit losses
on its accounts receivable. One customer accounted for more than
10% of Companys accounts receivable balance at
December 31, 2010 ($6,212) and no customer accounted for
more than 10% at December 31, 2009. No significant customer
had revenue greater than 10% in 2008 and 2010 and one major
customer had total revenue greater than 10% in 2009 ($8,071).
The 2009 sales were recorded in the North America, Europe Middle
East and Africa (EMEA), Asia Pacific
(APAC) and Latin America and the Caribbean
(LAC) segments.
Accounts
Receivable
In the normal course of business, the Company extends trade
credit to its customers. The standard credit terms are net
30 days.
Unbilled receivables represent labor hours and materials
provided under the terms of executed contracts but not yet
billed and are included in accounts receivable.
F-10
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Allowance
for Doubtful Accounts
Receivables are shown at the amount the Company believes will be
collected. The Company records an allowance for potential losses
on uncollectible accounts receivable. A portion of the
Companys customers make recurring payments using credit
cards, which reduces the Companys exposure for
uncollectible accounts receivable. For the customers that are
billed for services rendered, management considers the following
factors in assessing collectibility: (i) the Companys
historical write-offs, (ii) the aging of the accounts
receivable, including trends within the ratios involving the age
of the accounts receivable, (iii) changes in the
credit-worthiness of its customers, and (iv) general
economic conditions. In cases where the Company is aware of
circumstances that may impair a specific customers ability
to meet their obligations to it, the Company records a specific
allowance against amounts due from the customer. Customer
account balances are recorded against the allowance when the
Company considers it is probable that a receivable will not be
recovered.
Inventories
Inventories consist primarily of finished products held for
sale. Inventories are stated at the lower of cost or market,
using the
first-in,
first-out method. Rapid technological change and new product
introductions and enhancements could result in excess or
obsolete inventory. To reduce this risk, the Company performs
periodic reviews for obsolescence.
Property
and Equipment
Property and equipment are recorded at cost and depreciated
using the straight-line method over the estimated useful lives
of the related assets as follows:
|
|
|
Computer and equipment
|
|
3-5 years
|
Furniture and fixtures
|
|
7 years
|
Software
|
|
3-5 years
|
Leasehold improvements
|
|
shorter of lease term or estimated useful life
|
Equipment under capital leases
|
|
3-5 years
|
The Company recognized depreciation expense on property and
equipment of approximately $1,255, $2,020, and $2,731 in 2008,
2009, and 2010, respectively. Repairs and maintenance costs are
expensed as incurred. Upon retirement or sale, the cost of
assets disposed and the related accumulated depreciation are
written off and any resulting gain or loss is credited or
charged to income.
Goodwill
and Intangible Assets
Goodwill represents the excess of costs over the fair value of
the net assets of businesses acquired. Goodwill is not
amortized, but is subject to an impairment review annually and
whenever indicators of impairment exist. The Company tests for
goodwill impairment, at the reporting unit level, using a
two-step process. The first step involves a comparison of the
estimated fair value of each reporting unit with its carrying
value. Fair value is estimated using discounted cash flows of
the reporting unit based on planned growth rates, and estimates
of discount rates and residual values. If the carrying value
exceeds the fair value, the second step of the process is
necessary. The second step measures the difference between the
carrying value and implied fair value of goodwill. If the
carrying value exceeds fair value, goodwill is considered
impaired and is reduced to fair value. The Company performs its
annual goodwill impairment test in the fourth quarter. The
annual impairment tests conducted for 2008, 2009, or 2010 did
not result in impairment.
The Company amortizes its finite-lived intangibles over their
estimated useful lives and tests for potential impairment when
events or changes in circumstances suggest that the carrying
value of an asset or asset group may
F-11
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
not be fully recoverable. Finite-level intangible assets consist
of customer contracts, trademarks, technology, and non-compete
agreements. No impairment charges for intangible assets were
recorded in 2008, 2009 or 2010.
Business
Combinations
In December 2007, the FASB amended the authoritative guidance
for business combinations. The new guidance retains the
fundamental requirements of the historic business combinations
standard and broadens its scope by applying the acquisition
method to all transactions and other events in which an entity
obtains control over one or more businesses. Among other things,
the standard requires that assets acquired and liabilities
assumed be measured at fair value as of the acquisition date,
that acquisition-related costs be expensed as incurred, and that
income be recognized if the fair value of the net assets
acquired exceeds the fair value of the consideration
transferred. The new guidance was adopted by the Company on
January 1, 2009 and applied prospectively to all
acquisitions in 2009 and 2010. For 2008, acquisition-related
costs were included in the purchase price allocation.
Product
Development Costs
Costs incurred in research and development are expensed as
incurred and consist primarily of personnel costs and consulting
services.
Advertising
Advertising costs are charged to operations as incurred.
Advertising costs were approximately $179, $178, and $579 for
the years ended December 31, 2008, 2009, and 2010,
respectively.
Income
Taxes
The Companys provision for income taxes is primarily based
on current period income, changes in deferred tax assets and
liabilities and changes in estimates with regard to uncertain
tax positions. The Company estimates its current tax expense and
assesses temporary differences resulting from differing
treatments of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. The
Companys total deferred tax assets are principally
comprised of net operating loss carryforwards and expense
accruals.
Significant management judgment is required to assess the
likelihood that its deferred tax assets will be recovered from
future taxable income. In assessing the realizability of these
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will be realized. Management makes this assessment on a
jurisdiction by jurisdiction basis considering the historical
trend of taxable losses, projected future taxable income and the
reversal of deferred tax liabilities. As of December 31,
2010, the Company had a valuation allowance against $24,404 of
net deferred tax assets due to uncertainty of realization of
these deferred tax assets.
The Company evaluates income tax uncertainties, assesses the
probability of the ultimate settlement with the applicable
taxing authority and records an amount based on that assessment.
Interest and penalties, if any, associated with uncertain tax
positions are included in income tax expense.
Leases
The Company leases its office facilities under operating leases.
The Company accounts for certain operating leases that contain
rent escalation provisions, rent abatements and /or lease
incentives by recognizing rent expense on a straight-line basis
over the lease term. The difference between the rent paid and
the straight-line rent is recorded as a deferred liability.
Assets acquired under capital leases are amortized over a lease
term which coincides with the estimated useful life of the
leased assets. For purposes of recognizing the above mentioned
lease incentives on a
F-12
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
straight-line basis over the term of the lease, the Company uses
the date of initial possession to begin amortization. Lease
renewal periods are considered in the determination of the lease
term.
Stock-Based
Compensation
Under the accounting guidance related to stock-based payment
arrangements, companies are required to record compensation
expense, using a fair value based method, for costs related to
all share based payments, including stock options. Stock-based
compensation expense is recognized over the requisite service
period, which is the vesting period, on a straight-line basis.
Foreign
Currency Translation
The functional currency of the Companys international
subsidiaries is generally the local currency. Assets and
liabilities of the foreign subsidiaries are translated into
U.S. dollars using period-end rates of exchange while
income and expenses are translated at the average exchange rate
for the periods presented. Gains or losses resulting from
foreign currency translation are the only component of
accumulated other comprehensive loss in the consolidated balance
sheet. Gains or losses resulting from foreign currency
transactions and remeasurements are included in other income
(loss) in the consolidated statements of operations. Net foreign
currency gains (losses) included in other income (loss) were
$178, $(259), and $(232) in 2008, 2009, and 2010, respectively.
Commitments
and Contingencies
The Company evaluates all pending or threatened contingencies
and commitments, if any, that are reasonably likely to have a
material effect on its operations or financial position. The
Company assesses the probability of an adverse outcome and
records a provision for a liability when management believes
that it is probable that a liability has been incurred and the
amount can be reasonably estimated.
Presentation
of Certain Taxes
The Company collects various taxes from customers and remits
these amounts to the applicable taxing authorities. The
Companys accounting policy is to exclude these taxes from
revenue and cost of revenue.
Reclassifications
Certain prior year balances have been reclassified to conform to
the current year presentation.
F-13
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
2010
Acquisitions:
The table below summarizes the net assets acquired related to
the 2010 acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BitArmor
|
|
|
Intellitactics
|
|
|
Breach
|
|
|
Assets acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
441
|
|
|
$
|
2,302
|
|
|
$
|
10,111
|
|
Accounts receivable, net
|
|
|
242
|
|
|
|
2,610
|
|
|
|
846
|
|
Income taxes recoverable
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Inventory
|
|
|
|
|
|
|
7
|
|
|
|
78
|
|
Prepaid expenses and other
|
|
|
59
|
|
|
|
295
|
|
|
|
495
|
|
Fixed assets
|
|
|
152
|
|
|
|
361
|
|
|
|
306
|
|
Goodwill
|
|
|
3,416
|
|
|
|
5,674
|
|
|
|
3,956
|
|
Customer relationships
|
|
|
560
|
|
|
|
4,290
|
|
|
|
1,270
|
|
Developed technology
|
|
|
1,270
|
|
|
|
3,620
|
|
|
|
1,440
|
|
Trademarks
|
|
|
|
|
|
|
130
|
|
|
|
|
|
Other long-term assets
|
|
|
6
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
6,146
|
|
|
$
|
19,289
|
|
|
$
|
18,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
652
|
|
|
|
406
|
|
|
|
360
|
|
Accrued expenses & other
|
|
|
294
|
|
|
|
1,503
|
|
|
|
520
|
|
Accrued wages & related
|
|
|
35
|
|
|
|
513
|
|
|
|
939
|
|
Deferred revenue
|
|
|
770
|
|
|
|
4,449
|
|
|
|
1,570
|
|
Notes payable
|
|
|
945
|
|
|
|
5,333
|
|
|
|
|
|
Capital leases
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
2,696
|
|
|
$
|
12,225
|
|
|
$
|
3,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
3,450
|
|
|
$
|
7,064
|
|
|
$
|
15,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The useful lives for intangible assets for the acquired
companies in 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BitArmor
|
|
|
Intellitactics
|
|
|
Breach
|
|
|
Customer relationships
|
|
|
5.0
|
|
|
|
8.8
|
|
|
|
8.5
|
|
Developed technology
|
|
|
7.0
|
|
|
|
6.8
|
|
|
|
6.5
|
|
Trademarks
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
Total Weighted Average
|
|
|
6.4
|
|
|
|
7.8
|
|
|
|
7.4
|
|
BitArmor
Systems, Inc.
On January 6, 2010, Trustwave entered into an asset
purchase agreement with BitArmor Systems, Inc.
(BitArmor) a Delaware corporation, and acquired
certain assets and liabilities in return for
3,000,000 shares of the
F-14
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Companys Class A Common Stock. The transaction
qualified as a tax free reorganization under Section 368 of
the Internal Revenue Code. The Class A common stock issued
for this acquisition was valued based on the Companys
estimate of the fair value of the shares. The fair value of the
shares was determined by allocating the Companys
enterprise value using generally accepted valuation
methodologies such as discounted cash flows, guideline public
company and guideline transaction analysis. This acquisition
allows the Company to offer full disk encryption and persistent
file encryption and has served as a foundation for both its
DataControl solution and its
end-to-end
encryption product. Encrypting sensitive information is a key
component to complying with many data security standards,
including PCI. As a result of the acquisition, which was treated
as a qualified reorganization under Section 368 of the
Internal Revenue Code, the Company recorded goodwill of $3,416,
which is not deductible for income tax purposes. Such goodwill
is assigned to the North America segment and reflects the value
of the product portfolio enhancements from the BitArmor
acquisition. Transaction costs of approximately $69 have been
expensed as incurred as general and administrative expenses. The
total purchase price of $3,450 was allocated to acquired assets
and liabilities assumed based on their respective fair values at
January 6, 2010.
Intellitactics,
Inc
On March 1, 2010, AmbironTrustWave Government Solutions,
Inc., a Delaware corporation, a wholly owned subsidiary of
Trustwave entered into a stock purchase agreement acquiring all
the shares of Intellitactics, Inc. (Intellitactics),
a Delaware corporation in return for 6,228,928 shares of
the Companys common stock and 1,061,523 of Class A
common stock warrants. The Class A common stock issued for
this acquisition was valued based on the Companys estimate
of the fair value of the shares. The fair value of the shares
was determined by allocating the Companys enterprise value
using generally accepted valuation methodologies such as
discounted cash flows, guideline public company and guideline
transaction analysis. The Class A common stock warrants
were valued based on the present value at grant date using the
Black-Scholes pricing model. Intellitactics is a provider of
SIEM technology. The acquired technology provides comprehensive
reporting of events logged in networks, systems, applications
and databases, and is a critical component of robust security
architectures, as well as a requirement of many information
security regulations and industry standards. The total purchase
price of $7,064 was allocated to acquired assets and liabilities
assumed based on their respective fair value at March 1,
2010. As a result of the acquisition, the Company recorded
goodwill of $5,674, which is not deductible for income tax
purposes. Such goodwill is assigned to the North America segment
and reflects the value of the product portfolio enhancements
from the Intellitactics acquisition. Transaction costs of
approximately $131 have been expensed as incurred as general and
administrative expenses. Severance costs of $567, $46 and $56
have been expensed as incurred and recorded in general and
administrative, product development and sales and marketing
expenses, respectively.
Breach
Security, Inc.
On June 18, 2010, Trustwave Acquisition Corp., a Delaware
corporation, a wholly owned subsidiary of Trustwave entered into
a stock purchase agreement acquiring all the shares of Breach
Security, Inc. (Breach), a Delaware corporation in
return for 7,400,000 shares of the Companys
Class A Common Stock. The Companys Class A
common stock issued for this acquisition was valued based on the
Companys estimate of the fair value of the shares. The
fair value of the shares was determined by allocating the
Companys enterprise value arrived at using generally
accepted valuation methodologies such as discounted cash flows,
guideline public company and guideline transaction analysis.
This acquisition gave the Company access to WAF which provides
protection for web applications, such as
e-commerce
sites, against attacks. WAF helps organizations using active web
applications to safely maintain the flow of critical network
traffic into and out of their organizations and enables
compliance with multiple requirements of PCI as well as
requirements of other regulatory standards. The purchase price
of $15,170 was allocated to acquired assets and liabilities
assumed based on their respective fair values at the
June 18, 2010. As a result of the acquisition, which was
treated as a qualified reorganization under Section 368 of
the Internal Revenue
F-15
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Code, the Company recorded goodwill of $3,956, which is not
deductible for income tax purposes. Such goodwill is assigned to
the North America segment and reflects the value of the product
portfolio enhancements from the Breach acquisition. Transaction
costs of approximately $118 have been expensed as incurred as
general and administrative expenses. Severance costs of $222 and
$23 have been expensed as incurred and recorded in general and
administrative and sales and marketing expenses, respectively.
Financial results since the date of acquisition for acquired
entities have been included in the consolidated statement of
operations. The acquired businesses contributed revenues of
$16,012 to the Company from January 6, 2010 to
December 31, 2010. Net income is not segregated after the
acquirees respective acquisition date.
2009
Acquisitions:
The table below summarizes the net assets acquired related to
the 2009 acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Mirage
|
|
|
Vericept
|
|
|
Assets acquired
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
392
|
|
|
$
|
59
|
|
Accounts receivable, net
|
|
|
674
|
|
|
|
760
|
|
Inventory
|
|
|
138
|
|
|
|
191
|
|
Prepaid expenses and other
|
|
|
186
|
|
|
|
340
|
|
Fixed assets
|
|
|
70
|
|
|
|
294
|
|
Goodwill
|
|
|
|
|
|
|
5,360
|
|
Customer relationships
|
|
|
|
|
|
|
2,180
|
|
Developed technology
|
|
|
600
|
|
|
|
1,120
|
|
Non-compete agreement
|
|
|
110
|
|
|
|
50
|
|
Trademarks
|
|
|
50
|
|
|
|
210
|
|
Other long-term assets
|
|
|
112
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
2,332
|
|
|
$
|
10,645
|
|
Liabilities assumed
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
331
|
|
|
|
449
|
|
Accrued expenses & other
|
|
|
388
|
|
|
|
1,101
|
|
Accrued wages & related
|
|
|
321
|
|
|
|
489
|
|
Deferred revenue
|
|
|
740
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
1,780
|
|
|
$
|
6,898
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
552
|
|
|
$
|
3,747
|
|
|
|
|
|
|
|
|
|
|
F-16
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Also summarized are the useful lives for intangible assets for
the acquired companies:
|
|
|
|
|
|
|
|
|
|
|
Mirage
|
|
Vericept
|
|
Customer relationships
|
|
|
|
|
|
|
9.3
|
|
Developed technology
|
|
|
8.9
|
|
|
|
9.3
|
|
Trademarks
|
|
|
1.9
|
|
|
|
9.3
|
|
Non-compete agreements
|
|
|
2.9
|
|
|
|
4.3
|
|
Total Weighted Average
|
|
|
7.4
|
|
|
|
9.3
|
|
Mirage
Networks, Inc.
On February 1, 2009, TW Acquisition, Inc., a wholly owned
subsidiary of Trustwave entered into an asset purchase agreement
with Mirage Networks, Inc. (Mirage), a Texas
corporation, and acquired certain assets and liabilities in
return for the assumption of specific liabilities. The
technology acquired in the business combination added to the
range of compliance enablement solutions offered by the Company.
The total purchase price of $1,780 consisted of the assumption
of short-term liabilities and resulted in a gain on bargain
purchase of $552 which was recorded as a gain on acquisition in
the Consolidated Statement of Operations. The gain was the
result of the excess of total acquired assets over liabilities
assumed. Transaction costs of $32 were expensed as incurred and
recorded in general and administrative expense. The fair values
of the assets acquired and liabilities assumed are as of
February 1, 2009.
Vericept
Corporation
On August 26, 2009, TrustWave Acquisition, Inc., a wholly
owned subsidiary of Trustwave entered into a stock purchase
agreement acquiring all the shares of Vericept Corporation
(Vericept), a Delaware corporation, in return for
4,743,447 shares of the Companys Class A common
stock. The transaction was a cash merger treated as an asset
purchase for tax purposes. The Companys Class A
common stock issued for this acquisition was valued based on the
Companys estimate of the fair value of the shares. The
fair value of the shares was determined by allocating the
Companys enterprise value arrived at using generally
accepted valuation methodologies such as discounted cash flows,
guideline public company and guideline transaction analysis. The
Company acquired Vericept to give its customers access to
advanced data loss prevention solutions. As a result of the
acquisition, the Company recorded goodwill of $5,360, which is
deductible for income tax purposes, as the transaction was
treated as an asset purchase. Such goodwill is assigned to the
North America segment and reflects the value of the product
portfolio enhancements from the Vericept acquisition.
Transaction costs of $183 were expensed as incurred and have
been recorded in general and administrative expense. The total
purchase price of $3,747 was allocated to the acquired assets
and liabilities assumed based on their respective fair values on
August 26, 2009.
F-17
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
2008
Acquisition
The table below summarizes the net assets acquired related to
the 2008 acquisition:
|
|
|
|
|
|
|
ControlPath
|
|
|
Assets acquired
|
|
|
|
|
Accounts receivable, net
|
|
$
|
41
|
|
Prepaid expenses and other
|
|
|
5
|
|
Fixed assets
|
|
|
275
|
|
Developed technology (useful life of 5 years)
|
|
|
371
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
692
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
Deferred revenue
|
|
|
57
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
57
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
635
|
|
|
|
|
|
|
ControlPath
Inc.
On August 18, 2008, Trustwave executed an asset purchase
agreement with ControlPath Inc. (ControlPath), a
Delaware corporation, and acquired certain assets and
liabilities in return for cash consideration of $416 and
250,000 shares of the Companys Class A common
stock. The Companys Class A common stock issued for
this acquisition was valued based on the Companys estimate
of the fair value of the shares. The fair value of the shares
was determined by allocating the Companys enterprise value
(arrived at using generally accepted valuation methodologies
such as discounted cash flows, guideline public company and
guideline transaction analysis) to the various securities making
up the Companys equity structure. All goodwill arising on
this transaction is expected to be deductible for tax purposes.
ControlPath offers software platforms for managing and
automating enterprise governance, risk management and compliance
of multiple regulatory regimes. The total weighted average
useful life for intangible assets acquired is 5 years.
Unaudited
Supplemental Pro Forma Financial Information
The unaudited supplemental pro forma financial information in
the table below summarizes the combined results of operations
for Trustwave as if Mirage and Vericept were acquired on
January 1, 2008 and BitArmor, Breach, and Intellitactics
were acquired on January 1, 2009. The pro forma financial
information for all periods presented includes adjustments for
amortization of acquired intangible assets, acquisition-related
costs, conforming accounting policies, and elimination of
interest expense and any derivative gains or losses related to
the debt settled as part of the acquisitions. The pro forma
financial information as presented below is for informational
purposes only and is not indicative of the results of operations
that would have been achieved if the Mirage and Vericept
acquisitions had taken place on January 1, 2009 and if the
BitArmor, Breach, and Intellitactics acquisitions had taken
place on January 1, 2010.
F-18
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
Revenue
|
|
$
|
74,155
|
|
|
$
|
98,501
|
|
|
$
|
116,013
|
|
Net loss
|
|
$
|
(17,242
|
)
|
|
$
|
(19,786
|
)
|
|
$
|
(10,169
|
)
|
Net loss per weighted average share, basic and diluted
attributable to Trustwave common shareholders
|
|
$
|
(0.23
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.11
|
)
|
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Billed receivables
|
|
$
|
15,444
|
|
|
$
|
30,512
|
|
Unbilled receivables
|
|
|
1,768
|
|
|
|
3,134
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
17,212
|
|
|
|
33,646
|
|
Less: Allowance for doubtful accounts
|
|
|
591
|
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
16,621
|
|
|
$
|
32,099
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Balance at January 1
|
|
$
|
481
|
|
|
$
|
591
|
|
Charged to expense
|
|
|
662
|
|
|
|
1,476
|
|
Write-offs, net of recoveries
|
|
|
(552
|
)
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
591
|
|
|
$
|
1,547
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Leasehold improvements
|
|
$
|
2,728
|
|
|
$
|
3,763
|
|
Computer equipment
|
|
|
7,097
|
|
|
|
8,800
|
|
Software
|
|
|
948
|
|
|
|
1,466
|
|
Office furniture and equipment
|
|
|
1,039
|
|
|
|
1,428
|
|
Equipment under capital lease
|
|
|
1,361
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,173
|
|
|
|
16,976
|
|
Less: Accumulated depreciation
|
|
|
5,397
|
|
|
|
6,750
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets
|
|
$
|
7,776
|
|
|
$
|
10,226
|
|
|
|
|
|
|
|
|
|
|
F-19
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
The following table sets forth balance sheet information for
intangible assets subject to amortization, excluding goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
Developed
|
|
|
compete
|
|
|
|
|
|
|
Contracts
|
|
|
Trademarks
|
|
|
Technology
|
|
|
Agreements
|
|
|
Total
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying value
|
|
$
|
5,498
|
|
|
$
|
260
|
|
|
$
|
4,381
|
|
|
$
|
705
|
|
|
$
|
10,844
|
|
Accumulated amortization
|
|
|
(2,034
|
)
|
|
|
(22
|
)
|
|
|
(1,046
|
)
|
|
|
(577
|
)
|
|
|
(3,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
3,464
|
|
|
$
|
238
|
|
|
$
|
3,335
|
|
|
$
|
128
|
|
|
$
|
7,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying value
|
|
$
|
11,674
|
|
|
$
|
390
|
|
|
$
|
10,711
|
|
|
$
|
709
|
|
|
$
|
23,484
|
|
Accumulated amortization
|
|
|
(3,211
|
)
|
|
|
(116
|
)
|
|
|
(2,014
|
)
|
|
|
(655
|
)
|
|
|
(5,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
8,463
|
|
|
$
|
274
|
|
|
$
|
8,697
|
|
|
$
|
54
|
|
|
$
|
17,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $881, $992, and
$2,239 in 2008, 2009, and 2010, respectively. The portion of
this expense charged to cost of sales was $256, $317, and $823
for 2008, 2009, 2010, respectively. The remaining amortization
expense was recorded in general and administrative expense.
Amortization expense for the each of the five succeeding years
is expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Amortization expense
|
|
$
|
2,790
|
|
|
$
|
2,901
|
|
|
$
|
2,849
|
|
|
$
|
2,778
|
|
|
$
|
2,633
|
|
Intangible assets are all amortizable and have estimated useful
lives as follows:
|
|
|
|
|
|
|
Years
|
|
Intangible asset
|
|
|
|
|
Customer contracts
|
|
|
2 - 4
|
|
Customer relationships
|
|
|
5 - 10
|
|
Non-compete agreements
|
|
|
2 - 4
|
|
Trademarks
|
|
|
1 - 10
|
|
Developed technology
|
|
|
5 - 10
|
|
F-20
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
The changes in the carrying amount of goodwill for the year
ended December 31, 2009 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
EMEA
|
|
|
Total
|
|
|
Balance as of December 31, 2008
|
|
$
|
21,349
|
|
|
$
|
1,429
|
|
|
$
|
22,778
|
|
Acquisitions
|
|
|
5,360
|
|
|
|
|
|
|
|
5,360
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
143
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
26,709
|
|
|
$
|
1,572
|
|
|
$
|
28,281
|
|
Acquisitions
|
|
|
13,046
|
|
|
|
|
|
|
|
13,046
|
|
Foreign currency translation adjustments
|
|
|
768
|
|
|
|
(45
|
)
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
40,523
|
|
|
$
|
1,527
|
|
|
$
|
42,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The APAC and LAC segments have no goodwill.
During fiscal 2006, the Company assumed a loan for $583 due to a
financial institution. The loan had an effective interest rate
of 2.5% above the Prime Rate and was payable over
36 months. Total repayments were $250 and $83 in 2008 and
2009, respectively. The loan was fully repaid in April 2009.
In June 2007, the Company issued a subordinated, convertible
promissory note in the principal amount of $3,000. The effective
interest rate of 5.5% per annum on the note was payable monthly
beginning June 27, 2007 and on the last day of each month
thereafter through and including the maturity date of
May 31, 2010. The note was due in three installments of
$1,000 each on May 31, 2008, 2009 and 2010 and the Company
made all payments according to the installment schedule. The
note was fully paid in May 2010.
In September 2008, the Company executed a new loan agreement
under which the total limit on the lines of credit and short
term capital loans was raised from $3,000 to $10,000. Certain
terms and conditions of this original loan agreement were
modified in August 2009 and November 2010 which included an
increase in the credit line to $20,000. The agreement requires
that the Company comply with financial covenants by maintaining
certain levels of liquidity, meeting minimum targets for
Earnings Before Income Taxes and Depreciation and Amortization
(EBITDA), and limiting capital expenditures. The
interest rate on outstanding borrowings for this line of credit
was the Prime Rate and includes a fee of 0.25% on unused
portions of the revolving line. The line of credit is scheduled
to mature on November 30, 2011. We had no outstanding
borrowings under the line of credit and $1.5 million,
$1.7 million and $2.0 million of outstanding letters
of credit under this agreement as of December 31, 2008,
2009 and 2010.
The following is a geographical breakdown of loss before the
provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Domestic
|
|
$
|
(1,397
|
)
|
|
$
|
1,088
|
|
|
$
|
(2,034
|
)
|
Foreign
|
|
|
(627
|
)
|
|
|
(2,520
|
)
|
|
|
(2,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss before provision for income taxes
|
|
$
|
(2,024
|
)
|
|
$
|
(1,432
|
)
|
|
$
|
(4,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
The income tax expense (benefit) consisted of the following for
the years ended December 31, 2008, 2009, and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
94
|
|
|
|
222
|
|
Foreign
|
|
|
31
|
|
|
|
28
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current taxes
|
|
|
31
|
|
|
|
122
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(384
|
)
|
|
|
447
|
|
|
|
(1,147
|
)
|
State
|
|
|
(93
|
)
|
|
|
108
|
|
|
|
157
|
|
Foreign
|
|
|
(93
|
)
|
|
|
(611
|
)
|
|
|
(722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes
|
|
|
(570
|
)
|
|
|
(56
|
)
|
|
|
(1,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) expense before valuation allowance
|
|
|
(539
|
)
|
|
|
66
|
|
|
|
(1,316
|
)
|
Increase of valuation allowance against deferred tax assets
|
|
|
561
|
|
|
|
48
|
|
|
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
|
22
|
|
|
|
114
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax assets and liabilities arising from
temporary differences at December 31, 2009 and 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Depreciation
|
|
|
(1,467
|
)
|
|
|
(2,093
|
)
|
Intangible assets amortization
|
|
|
(1,692
|
)
|
|
|
(6,105
|
)
|
Net operating losses
|
|
|
7,359
|
|
|
|
24,324
|
|
Accrued expenses
|
|
|
1,385
|
|
|
|
6,710
|
|
Wages and related
|
|
|
274
|
|
|
|
500
|
|
Allowance for doubtful accounts
|
|
|
138
|
|
|
|
292
|
|
Stock-based compensation
|
|
|
565
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
6,562
|
|
|
|
24,478
|
|
Valuation allowance balance
|
|
|
(6,544
|
)
|
|
|
(24,404
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
18
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
F-22
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
The differences between the U.S. federal statutory tax rate
and the Companys effective rate for the years ended
December 31, 2008, 2009, and 2010 are reflected in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
Federal statutory income tax
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income tax, net of federal tax benefit
|
|
|
3.5
|
%
|
|
|
(10.6
|
)%
|
|
|
6.6
|
%
|
Effect of foreign taxes
|
|
|
(4.7
|
)%
|
|
|
(19.2
|
)%
|
|
|
(4.7
|
)%
|
Meals and entertainment
|
|
|
(6.1
|
)%
|
|
|
(8.8
|
)%
|
|
|
(3.8
|
)%
|
Valuation allowance net of deferred tax assets
|
|
|
(27.7
|
)%
|
|
|
(3.4
|
)%
|
|
|
(39.7
|
)%
|
Other
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(1.0
|
)%
|
|
|
(8.0
|
)%
|
|
|
(8.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company determines its valuation allowance on deferred tax
assets by considering both positive and negative evidence in
order to ascertain whether it is more likely than not that
deferred tax assets will be realized. The Company has determined
that the cumulative net losses in recent periods required that
they record a valuation allowance of $24,404 against all of the
Companys net deferred tax assets in the United States, the
United Kingdom, Canada, Singapore, Mexico, Brazil, Hong Kong and
India. Total net operating losses, from all jurisdictions,
available to offset future taxable income are $60,984 as of
December 31, 2010. Approximately $637 of the federal net
operating loss carryforwards resulted from exercises of employee
stock options and were not recorded on the Companys
consolidated balance sheet. Such unrecognized deferred tax
benefits will be accounted for as a credit to additional
paid-in-capital
if and when realized through a reduction in income tax payable.
The Companys subsidiaries in Israel and South Africa
reported taxable income in 2010 and accrued $69 in income taxes.
Also in 2010, the Companys subsidiary in Singapore had
physical presence in China and accrued approximately $40 in
income taxes. The increase in tax expense in 2010 relates
primarily to state minimum taxes, gross receipts tax and similar
state taxes of $222.
At December 31, 2010, the Company has federal net operating
loss carry-forwards (NOL) of approximately $45,267
available to reduce future taxable income in the United States.
Under the provisions of Section 382 of the Internal Revenue
Code, the change in ownership caused by the merger of Ambiron
LLC and Trustwave Corporation in March of 2005 limited the
annual deduction related to $5,800 of accumulated net operating
losses to approximately $740 per year. Section 382 of the
Internal Revenue Code also limited the annual deduction related
to $10,500 of accumulated net operating losses acquired through
the acquisition of SecurePipe, Inc. in December of 2006 to
approximately $537 per year. The Companys net operating
loss carryforwards are subject to expiration from 2022 through
2030.
Pursuant to Internal Revenue Code Sections 382, the use of
the Companys acquired subsidiaries net operating
loss and credit carryforwards may be limited if a cumulative
change in ownership of more than 50% occurs within a three-year
period from the acquisition date. The annual limitation may
result in the expiration of net operating losses and credits
before utilization.
The Company is in a process of preparing a study to assess
whether an ownership change has occurred or whether there have
been multiple ownership changes since the acquired
subsidiaries formation. If any of the acquired
subsidiaries has experienced an ownership change at any time
since its formation, and prior to the acquisition, utilization
of the NOL carryforwards would be subject to an annual
limitation under Section 382 of the Internal Revenue Code.
Any limitation may result in expiration of a portion of the NOL
carryforwards before utilization. Further, until a study is
completed and any limitation known, no amounts are being
considered as an uncertain tax position or disclosed as an
unrecognized tax benefit. Due to the existence of the valuation
allowance, future changes in the Companys unrecognized tax
benefits will not impact its effective tax rate. Any NOL
carryforwards that will expire prior to utilization as a result
of such limitations will be removed from deferred tax assets
with a corresponding reduction of the valuation allowance.
F-23
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
The Company is a direct owner of certain foreign subsidiaries.
Deferred foreign income taxes are not provided for unremitted
foreign earnings of such foreign subsidiaries because the
company expects earnings will be indefinitely reinvested and
such amounts of unremitted earnings would not be material.
The Company has cumulative losses in its worldwide foreign
subsidiaries. The foreign operations that have undistributed
earnings are newly formed entities that expect to use the
earnings to fund growth and expansion in the jurisdictions they
operate.
As of December 31, 2010, the Company had $124 of
liabilities recorded as a result of tax positions taken in prior
periods, of which $50 were related to penalties. The Company
does not expect that changes in the liability for unrecognized
tax benefits during the next 12 months will have a
significant impact on financial position or results of
operations. The Company recorded $14 of interest and penalties
in 2010 and no interest or penalties were incurred in 2008 and
2009.
The Company and its subsidiaries are subject to taxation in the
U.S. and various states as well as in certain foreign
jurisdictions. The Company remains subject to examination by the
U.S. federal, state and foreign taxing authorities for the
years 2005 through 2009.
For 2009, the classification of deferred tax balances has been
revised to show the effects of assets and liabilities by
jurisdiction.
Capital
Leases
The following is a schedule of future minimum lease payments
under capital leases:
Capital
Leases
|
|
|
|
|
Year Ending December
31,
|
|
|
|
|
2011
|
|
$
|
498
|
|
2012
|
|
|
324
|
|
2013
|
|
|
10
|
|
|
|
|
|
|
|
|
|
832
|
|
Less: Portion representing interest at 5.00% to 9.98%
|
|
|
62
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
770
|
|
Less: Portion due within one year
|
|
|
450
|
|
|
|
|
|
|
|
|
$
|
320
|
|
|
|
|
|
|
The following is an analysis of the leased property under
capital leases:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Computer equipment
|
|
$
|
1,361
|
|
|
$
|
1,519
|
|
Less: Accumulated amortization
|
|
|
(193
|
)
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,168
|
|
|
$
|
1,028
|
|
|
|
|
|
|
|
|
|
|
The capital leases expire in July 2011, March 2012, October 2012
and February 2013 and require monthly payments ranging from $1
to $26, including interest.
F-24
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Operating
Leases
The Company currently occupies nine domestic facilities under
operating leases. The facilities are located in Chicago,
Illinois; Greenwood Village, Colorado; Madison, Wisconsin;
Addison, Texas; Austin, Texas; Waltham, Massachusetts,
Pittsburgh, Pennsylvania; Reston, Virginia and Carlsbad,
California. Rents under certain of the Companys operating
leases increase throughout the term of the lease. In accordance
with the applicable accounting guidance, the Company records
rent expense on these leases straight-line over the term of the
lease. The operating leases expire on various dates through
October 2019. Monthly rentals range from $2 to $49. The Company
is responsible for taxes, insurance, and maintenance. Certain of
the leases provide for a five year renewal option upon
expiration of the initial lease term.
The Company also has facilities rented under operating leases in
London, England; Stockholm, Sweden; Pretoria, South Africa;
Cambridge, Canada; Sao Paolo, Brazil; and Herzliya, Israel.
These leases expire on various dates through April 2015. Monthly
rentals range from $4 to $21.
Rent expense under all operating leases was $1,129, $2,075, and
$3,268 in 2008, 2009, and 2010, respectively.
The Company vacated its office space in Arizona in 2005 and
executed a sublease agreement for the facility. The base rental
amounts due for the office space for the balance of the term
exceeded the total payments received under the sublease
agreement by $19 in 2009. In 2005, the Company also entered into
a lease for its Annapolis, Maryland office and was able to
execute a sublease agreement for its previous office space. The
sublease agreements provided for base monthly rentals ranging
from $7 to $36 and expired on various dates in 2009. The
sublease tenants are responsible for taxes, insurance, and
maintenance.
Rental income obtained from the subleasee was $525, $306, and
$24, in 2008, 2009, and 2010, respectively. Final payments
received in 2010 were per an amended payment schedule. No other
sublease agreements exist as of December 31, 2010.
Minimum lease payments for the next 5 years under
non-cancelable operating leases as of December 31, 2010 are
as follows:
Operating
Leases
|
|
|
|
|
2011
|
|
$
|
2,499
|
|
2012
|
|
|
1,539
|
|
2013
|
|
|
1,068
|
|
2014
|
|
|
927
|
|
2015
|
|
|
884
|
|
|
|
|
|
|
|
|
$
|
6,917
|
|
|
|
|
|
|
As part of the consideration for the 2006 acquisition of
SecurePipe, Inc., the Company issued 78,580 warrants to purchase
shares of the Companys Class A common stock. Each
warrant, exercisable immediately, enables the holder to purchase
one share of Class A common stock for $0.83 per share. The
warrants expire on April 26, 2016.
F-25
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
As part of the Intellitactics acquisition in 2010, the Company
issued 1,061,523 warrants, exercisable immediately, to purchase
the Companys Class A common stock. Warrants were
issued as follows:
|
|
|
|
|
|
|
|
|
Number of
|
|
Exercise
|
|
|
Warrants
|
|
Price
|
|
Expiration Date
|
|
|
82,639
|
|
|
$
|
6.05
|
|
|
June 12, 2014
|
|
25,000
|
|
|
$
|
3.00
|
|
|
November 13, 2015
|
|
953,884
|
|
|
$
|
1.08
|
|
|
February 28, 2020
|
In September 2010, the Board of Directors awarded 500,000
warrants to a Director of the Company. The warrants, exercisable
immediately, expire on September 21, 2015 and entitle the
grantee to acquire Class A common stock for $2.05 per
share. The Company recorded $460 of related compensation charges
in general and administrative expenses in 2010.
The fair values of warrants issued in 2010 were valued at the
grant date using the Black-Scholes option pricing model using
the following average assumptions for the year ended
December 31, 2010:
|
|
|
|
|
Volatility
|
|
|
38.1
|
%
|
Dividend yield
|
|
|
0
|
%
|
Weighted-average expected warrant life (in years)
|
|
|
5.0
|
|
Risk free rate
|
|
|
2.07
|
%
|
Weighted average fair value per warrant at issuance date
|
|
$
|
0.51
|
|
Accounting guidance requires that the fair value of a liability
for costs associated with an exit or disposal activity be
recognized and measured when the liability is incurred. The
Company has initiated integration plans including workforce
reductions which involve employee severance benefits and
abandonment of excess facilities related to an acquisition.
Severance
The Company accounted for severance obligations in accordance
with accounting guidance on exit and disposal activities because
the majority of the severance activities related to one-time
events in 2006 and 2010 and the company has no exiting plans. As
a result of an acquisition in December 2006, the Company paid
severance to former employees from 2007 to 2009.
In 2010, the Intellitactics and Breach acquisitions resulted in
$914 of severance charges. Cash payments were made in 2010 and
will continue through 2011.
Facilities
Excess facilities charges take into account the fair value of
the future lease obligations of the abandoned space, including
the potential for sublease income. Estimating the amount of
sublease income requires management to make estimates for the
space that will be rented, the rate per square foot that might
be received and the vacancy period of each property. These
estimates could differ materially from actual amounts due to
changes in the real estate markets in which the properties are
located, such as changes in the supply of office space and
prevailing lease rates. Changing market conditions by location
and considerable work with third-party leasing companies require
us to periodically review each lease and change the
Companys estimates on a prospective basis, as necessary.
F-26
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
In December 2010, the Company abandoned its facility in
Carlsbad, California. The Company recorded a lease abandonment
accrual for $450 and facility impairment costs for $98. The
lease abandonment accrual is net of $107 in estimated sublease
income.
The table below summarizes both the severance and facilities
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Accrued
|
|
|
|
|
|
|
Severance
|
|
|
Facilities
|
|
|
|
|
|
|
Costs
|
|
|
Costs
|
|
|
Total
|
|
|
Balance at January 1, 2008
|
|
$
|
248
|
|
|
$
|
40
|
|
|
$
|
288
|
|
Cash payments
|
|
|
(238
|
)
|
|
|
(19
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
31
|
|
Cash payments
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
Adjustments
|
|
|
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Severance/Facilities expense
|
|
|
914
|
|
|
|
450
|
|
|
|
1,364
|
|
Cash payments
|
|
|
(688
|
)
|
|
|
|
|
|
|
(688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
226
|
|
|
$
|
450
|
|
|
$
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Both office integration and severance pay expenses were recorded
in general and administrative expense on the consolidated
statements of operations and in accrued expenses and other on
the consolidated balance sheets. These expenses were only
incurred in the North America business segment.
Trustwave Holdings qualified 401(k) plan covers employees over
age 21 credited with at least one month of service.
Participating employees can contribute up to $16.5 of their
compensation, subject to statutory limitations. The Company may,
at its discretion, match 50% of the amount contributed by each
employee to a maximum of 6% of each employees
compensation. The plan may be amended or terminated at any time.
The Companys contributions were $459, $748, and $968 for
2008, 2009, and 2010, respectively.
Class A
Voting Common Stock
The holders of Class A common stock are entitled to receive
dividends, when and as declared by the Board of Directors, and
to vote on all matters entitled to be voted on by the
stockholders of the Company.
Class B
Non-voting Convertible Common Stock
The holders of Class B common stock are not entitled to
receive dividends or to vote on any Company matters.
Class B common shares automatically convert to Class A
shares on a 1:1 ratio upon the occurrence of liquidation,
dissolution, or winding up of the Company subject to certain
qualifications, or on the closing of the sale of shares of
Class A common stock in an underwritten public offering
subject to certain qualifications.
Series B
Convertible Preferred Stock
In June 2008, the Company issued the Series B shares of
preferred stock (Series B Preferred) and as of
December 31, 2009 and 2010 there were 5,882,353 shares
issued and outstanding. Series B Preferred ranks senior to
F-27
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Class A and B common stock and junior to
Series A-1
and A-2
preferred stock as to dividends and upon liquidation,
dissolution or winding up. Each Series B Preferred holder
is entitled to voting rights equivalent to those votes which the
holder would have as a Class A common stock holder upon
conversion.
Series B Preferred shares are entitled to a liquidation
preference equal to the original purchase price plus any
Series B Preferred accrued unpaid dividends, less any
participating dividends received. As of December 31, 2009
and 2010, the liquidation preference of Series B Preferred
was $11,241 and $12,041, respectively.
The holders of the Series B Preferred shares are entitled
to receive cumulative annual dividends at an annual rate of 8.0%
on the original issuance price. Such dividends are payable only
upon liquidation, dissolution or winding up of the Company or
when declared by the Board of Directors. Participating dividends
may also be paid to Series B Preferred holders to the
extent dividends are paid to common stockholders. For 2009, the
presentation of the Series B Preferred shares has been
revised to record previously recorded accreted, unpaid,
undeclared dividends as additional paid in capital.
Each share of Series B Preferred is convertible, at the
option of the holder, into Class A common stock at any time
at a conversion ratio of 1 to 1. The conversion ratio is subject
to adjustment for events such as a stock split or stock
dividend. All of the Series B Preferred shares outstanding
shall automatically be converted into shares of Class A
common stock upon the closing of the sales of shares of
Class A common stock pursuant to an underwritten public
offering.
|
|
14.
|
Convertible
Redeemable Preferred Stocks
|
The Companys authorized convertible redeemable preferred
stock as of December 31, 2009 and 2010 consists of
22,457,891 shares of preferred stock, par value $0.0001 of
which 10,952,633 are designated as
Series A-1
preferred stock and 11,505,258 shares are designated as
Series A-2
preferred stock.
Series A-1
Convertible Redeemable Preferred Stock
At December 31, 2009 and 2010 there were
10,952,633 shares of
Series A-1
preferred stock
(Series A-1)
issued and outstanding.
Series A-1 shares
rank senior to common stock and Series B Preferred stock of
the Company as to dividends and upon liquidation, dissolution or
winding up. Each
Series A-1
holder is entitled to voting rights equivalent to those votes
which the holder would have as a Class A common stock
holder upon conversion.
Series A-1 shares
are entitled to a liquidation preference equal to the original
purchase price plus any
Series A-1
accrued unpaid dividends, less any participating dividends
received. As of December 31, 2009 and 2010, the liquidation
preference of
Series A-1
was $13,041 and $13,541, respectively.
At any time on or after April 8, 2009, all of the
outstanding shares of
Series A-1
preferred stock can be redeemed at the written request of the
holders of
662/3%
of the
Series A-1
preferred stock at an amount equal to the liquidation preference.
The holders of the
Series A-1 shares
are entitled to receive cumulative annual dividends at the rate
of $0.045651 per each share. Such dividends are payable upon
liquidation, dissolution or winding up of the Company,
redemption of
Series A-1,
or when declared by the Board of Directors. Participating
dividends may also be paid to
Series A-1
holders to the extent dividends are paid to common stockholders.
Each share of
Series A-1
is convertible, at the option of the holder, into Class A
common stock at any time at a conversion ratio of 1 to 1. The
conversion ratio is subject to adjustment for events such as a
stock split, stock dividend or an issuance of stock. All
Series A-1 shares
outstanding shall automatically be converted into shares of
Class A common stock at the then effective conversion
price, upon a vote of
662/3%
of the Series A preferred
F-28
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
stockholders to do so, or upon the closing of the sales of
shares to Class A common stock pursuant to an underwritten
public offering.
Series A-2
Convertible Redeemable Preferred Stock
At December 31, 2009 and 2010 there were
11,505,258 shares of
Series A-2
preferred stock
(Series A-2)
issued and outstanding.
Series A-2
has the same rights, privileges and restrictions as
Series A-1,
except the annual dividend per share is $0.043458. As of
December 31, 2009 and 2010, the liquidation preference of
Series A-2
was $7,393 and $7,893, respectively.
The Company adopted the Trustwave Stock Incentive Plan (the
Plan) in May 2001. Under the Plan, the Company may
grant incentive stock options, non-qualified stock options and
shares of common stock to officers, directors, employees and
others. The Company issues new shares of stock upon the exercise
of stock options. Options may be granted that are exercisable
into either Class A or Class B common stock. The
Board, at its sole discretion, determines the price of the
shares subject to an option on the date of the grant. Generally,
these options vest and become exercisable over a period of four
years and the exercise price is set at the grant-date fair
market value of Companys stock, as determined by a
third-party appraisal. Options awarded under the Plan may carry
a term of up to 10 years from the grant date.
The Board has reserved 22,155,957 shares of the
Companys stock for the Plan. The compensation cost charged
against income for the Plan was approximately $246, $278, and
$566 in 2008, 2009, and 2010, respectively. The Company did not
realize any current tax benefits related to the exercise of
stock options.
The fair value of stock options for Class A common stock is
calculated based on the estimated present value at grant date
using the Black-Scholes option pricing model that uses
assumptions in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility
|
|
|
45.0
|
%
|
|
|
39.0
|
%
|
|
|
32.0
|
%
|
Risk-free interest rate
|
|
|
3.36
|
%
|
|
|
2.73
|
%
|
|
|
2.74
|
%
|
Weighted-average expected option life (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
Weighted-average grant-date fair value of options
|
|
$
|
0.38
|
|
|
$
|
0.32
|
|
|
$
|
0.50
|
|
Total intrinsic value of options exercised
|
|
$
|
453
|
|
|
$
|
524
|
|
|
$
|
637
|
|
The dividend yield was based on the Companys policy of not
paying dividends, which we expect to continue in the future. The
volatility assumption is based on implied and historical stock
price volatility of a peer group of publicly traded companies.
The risk-free interest rate assumption is based on United States
Treasury instruments. The expected life was estimated using the
simplified method for all options in all periods as the Company
does not have sufficient historical exercise data.
F-29
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
The following table summarizes the activity of the
Companys stock option plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 12/31/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value(1)
|
|
|
Outstanding beginning of period
|
|
|
13,640,117
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
Granted at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1,849,500
|
|
|
|
1.34
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
(288,988
|
)
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
(298,441
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
(469,529
|
)
|
|
|
0.86
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
(2,344
|
)
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
(89,918
|
)
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
(92,659
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period
|
|
|
14,247,738
|
|
|
$
|
0.53
|
|
|
|
5.07
|
|
|
$
|
33,623
|
|
Class A
|
|
|
11,855,036
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
2,392,702
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at December 31,
2010(2)
|
|
|
13,853,007
|
|
|
|
0.52
|
|
|
|
4.97
|
|
|
|
32,885
|
|
Exercisable at end of period
|
|
|
10,302,255
|
|
|
|
0.34
|
|
|
|
3.69
|
|
|
|
26,252
|
|
|
|
|
(1)
|
|
The Company has computed the
aggregate intrinsic value amounts disclosed in the above table
based on the difference between the original exercise price of
the options and the estimated fair value of the Companys
common stock of $2.89 per share at December 31, 2010.
|
(2)
|
|
Options vested and expected to vest
reflect the Companys estimated forfeiture rates.
|
F-30
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
A summary of the Companys non-vested stock option grants
at December 31, 2010 and changes during the years are
presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
Class B
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Grant Date
|
|
|
|
Grant Date
|
Equity Classified
Awards
|
|
Number
|
|
Fair Value
|
|
Number
|
|
Fair Value
|
|
Non-vested at December 31, 2009
|
|
|
4,037,699
|
|
|
$
|
0.33
|
|
|
|
39,758
|
|
|
$
|
0.10
|
|
Granted
|
|
|
1,849,500
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(1,472,187
|
)
|
|
|
0.34
|
|
|
|
(37,414
|
)
|
|
|
0.10
|
|
Forfeited
|
|
|
(469,529
|
)
|
|
|
0.35
|
|
|
|
(2,344
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2010
|
|
|
3,945,483
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested during the year was $229,
$254, and $496 in 2008, 2009, and 2010, respectively.
As of December 31, 2010 total compensation costs related to
unvested stock option grants not yet recognized was $1,200, to
be recognized over 1.4 years. Total cash received from
exercises of share options was $193, $135, and $97 in 2008,
2009, and 2010, respectively. Due to the accumulated net
operating losses, the Company did not realize any tax benefits
for the exercise of stock options.
Basic net loss per common share is calculated by dividing net
loss available to common stockholders by the weighted average
Class A common stock outstanding for the period. Diluted
earnings per common share is calculated by dividing net income
by the weighted average number of Class A common shares
outstanding for the period plus amounts representing the
dilutive effect of stock options on Class A common,
warrants, restricted stock and convertible preferred stock, as
applicable. Preferred dividends were added to net loss in
arriving at net loss attributable to common shareholders. The
Company calculates basic net loss and diluted net loss per
common share using the treasury stock method, the
as-if-converted method, and the two-class method, as applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2008
|
|
2009
|
|
2010
|
|
Net loss
|
|
$
|
(2,046
|
)
|
|
$
|
(1,546
|
)
|
|
$
|
(4,622
|
)
|
Less: Cumulative annual preferred dividends
|
|
|
(1,441
|
)
|
|
|
(1,800
|
)
|
|
|
(1,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
(3,487
|
)
|
|
|
(3,346
|
)
|
|
|
(6,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and diluted)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
Weighted average shares outstanding (basic and diluted)
|
|
|
69,100,346
|
|
|
|
71,339,985
|
|
|
|
86,721,283
|
|
Weighted average shares have been revised for the years ended
2008, 2009 and 2010 to exclude Class B common shares from
the weighted average shares outstanding. Weighted average shares
as previously reported were 71,047,256, 73,904,725 and
89,109,669 for the years ended 2008, 2009 and 2010,
respectively. Weighted average shares as revised were
69,100,346, 71,339,985 and 86,721,283 for the years ended 2008,
2009 and 2010, respectively.
F-31
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
As shares of Class B common stock are not entitled to
receive dividends or to vote on any Company matters in their
current form, no income or loss is allocated to these shares for
basic earnings per share calculations. Upon the occurrence of
liquidation, dissolution or winding up of the Company, or on the
closing of the sale of shares of Class A common stock in an
underwritten public offering subject to certain qualifications,
the shares of Class B common stock automatically convert
into shares of Class A common stock. However, since the
conditions for conversion have not been met, shares and options
of Class B common are excluded from the computation of
diluted earning per share.
Due to the Companys loss position in 2008, 2009, and 2010,
the impacts of preferred stock, options on Class A common,
and warrants were excluded from the calculation of diluted
earnings per share because the effects are antidilutive. The
following instruments may have a dilutive effect in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2008
|
|
2009
|
|
2010
|
|
Stock options outstanding
|
|
|
12,198,717
|
|
|
|
13,640,117
|
|
|
|
14,247,738
|
|
Stock warrants outstanding
|
|
|
78,580
|
|
|
|
78,580
|
|
|
|
1,640,103
|
|
Convertible preferred shares
|
|
|
28,340,242
|
|
|
|
28,340,242
|
|
|
|
28,340,242
|
|
Class B common stock
|
|
|
1,983,312
|
|
|
|
2,934,847
|
|
|
|
3,233,288
|
|
Unaudited
Pro Forma Net Loss Per Share
Unaudited pro forma basic and diluted net loss per common share
for the year ended December 31, 2010 have been computed to
give effect to the conversion of
Series A-1,
Series A-2,
Series B convertible preferred and Class B common
stock as though the conversion had occurred as of
January 1, 2010. Due to the Companys loss position in
2010, the impacts of options and warrants were excluded from the
calculation of diluted earnings per share because the effects
are antidilutive.
The Company conducts its business in four geographic operating
segments. The results of these geographic operating segments are
reviewed regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The four operating segments are North America, EMEA, APAC and
LAC. The products and services from which each operating segment
derives its revenues are similar and include both compliance
management and compliance enablement solutions. Revenues are
attributed to a geographic area based on the location of the
customer.
The Company defines Adjusted EBITDA, a non-GAAP financial
measure, as net income (loss) before income tax expense
(benefit), depreciation and amortization, net interest expense,
stock-based compensation, gain (loss) on foreign currency
exchange, severance and transition costs, and acquisition,
transaction and integration expenses. The Company reports
segment results in a manner consistent with managements
internal reporting of operating results to the chief operating
decision maker (Chief Executive Officer) for purposes of
evaluating segment performance and allocating resources.
Adjusted EBITDA is not a measure of financial performance under
GAAP. Items excluded from Adjusted EBITDA are significant
components in understanding and assessing financial performance.
Adjusted EBITDA should not be considered in isolation or as an
alternative to, or substitute for, net income, net change in
cash and cash equivalents or other financial statement data
presented in the consolidated financial statements as indicators
of financial performance or liquidity. Because Adjusted EBITDA
is not a measurement determined in accordance with GAAP and thus
is susceptible to varying calculations, Adjusted EBITDA as
presented may not be comparable to other similarly titled
measures of other companies.
F-32
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Items that apply to the Company as a whole (such as corporate
expenses) are included in the North America operating segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America(1)
|
|
$
|
47,932
|
|
|
$
|
61,936
|
|
|
$
|
94,706
|
|
EMEA
|
|
|
9,640
|
|
|
|
9,957
|
|
|
|
13,509
|
|
LAC
|
|
|
268
|
|
|
|
579
|
|
|
|
1,980
|
|
APAC
|
|
|
488
|
|
|
|
635
|
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,328
|
|
|
$
|
73,107
|
|
|
$
|
111,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,874
|
|
|
$
|
2,726
|
|
|
$
|
4,690
|
|
EMEA
|
|
|
262
|
|
|
|
286
|
|
|
|
276
|
|
LAC
|
|
|
|
|
|
|
|
|
|
|
3
|
|
APAC
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,136
|
|
|
$
|
3,012
|
|
|
$
|
4,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
47,870
|
|
|
$
|
79,117
|
|
|
$
|
108,985
|
|
EMEA
|
|
|
6,116
|
|
|
|
5,518
|
|
|
|
8,900
|
|
LAC
|
|
|
308
|
|
|
|
724
|
|
|
|
2,312
|
|
APAC
|
|
|
727
|
|
|
|
1,316
|
|
|
|
1,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,021
|
|
|
$
|
86,675
|
|
|
$
|
122,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment reported Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
959
|
|
|
$
|
4,175
|
|
|
$
|
7,111
|
|
EMEA
|
|
|
8
|
|
|
|
329
|
|
|
|
492
|
|
LAC
|
|
|
(254
|
)
|
|
|
(624
|
)
|
|
|
(1,817
|
)
|
APAC
|
|
|
(306
|
)
|
|
|
(801
|
)
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment reported Adjusted EBITDA
|
|
$
|
407
|
|
|
$
|
3,079
|
|
|
$
|
4,856
|
|
Taxes
|
|
|
(22
|
)
|
|
|
(114
|
)
|
|
|
(372
|
)
|
Depreciation and amortization
|
|
|
(2,136
|
)
|
|
|
(3,012
|
)
|
|
|
(4,970
|
)
|
Interest expense, net
|
|
|
(151
|
)
|
|
|
(112
|
)
|
|
|
(87
|
)
|
Stock compensation expense
|
|
|
(285
|
)
|
|
|
(278
|
)
|
|
|
(1,026
|
)
|
Foreign currency exchange gains (losses)
|
|
|
178
|
|
|
|
(259
|
)
|
|
|
(232
|
)
|
Severance and transition costs
|
|
|
|
|
|
|
(948
|
)
|
|
|
(1,268
|
)
|
Acquisition, transaction and integration expenses
|
|
|
(37
|
)
|
|
|
98
|
|
|
|
(1,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,046
|
)
|
|
$
|
(1,546
|
)
|
|
$
|
(4,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues in the United States were $45,590, $57,962, and $86,896
in 2008, 2009, and 2010, respectively.
F-33
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended December 31, 2008, 2009 and 2010
Long-lived assets, excluding financial instruments, deferred tax
assets, goodwill and intangible assets, in the United States
were $7,701 at December 31, 2009 and $9,434 at
December 31, 2010.
Internationally, long-lived assets, excluding financial
instruments and deferred tax assets, were $178 at
December 31, 2009 and $870 at December 31, 2010. No
country other than the United States accounted for 10% or more
of total long-lived assets, excluding financial instruments,
deferred tax assets, goodwill and intangible assets at
December 31, 2009 or 2010.
|
|
18.
|
Commitments
and Contingent Liabilities
|
The Company is involved in various legal proceedings in the
normal course of business. It is managements opinion,
after consultation with counsel and a review of the facts, that
the ultimate liability, if any, arising from such contingencies
will not have any material adverse effect on the Companys
financial position and results of operations.
The Company has evaluated subsequent events after the balance
sheet date through April 21, 2011, which is the date the
financial statements were issued. The Company determined that
there were no subsequent events or transactions that required
recognition or disclosure in the consolidated financial
statements.
F-34
TRUSTWAVE
HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
March 31, 2011
|
|
|
|
2010
|
|
|
2011
|
|
|
(Notes 11 and 12)
|
|
|
|
(in thousands, except share
|
|
|
|
and per share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,558
|
|
|
$
|
18,492
|
|
|
|
|
|
Accounts receivable, net
|
|
|
32,099
|
|
|
|
25,480
|
|
|
|
|
|
Inventories
|
|
|
488
|
|
|
|
422
|
|
|
|
|
|
Deferred tax asset, current
|
|
|
1,539
|
|
|
|
1,215
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
3,542
|
|
|
|
4,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
52,226
|
|
|
|
50,260
|
|
|
|
|
|
Property and equipment, net
|
|
|
10,226
|
|
|
|
10,454
|
|
|
|
|
|
Intangible assets, net
|
|
|
17,488
|
|
|
|
16,804
|
|
|
|
|
|
Goodwill
|
|
|
42,050
|
|
|
|
42,587
|
|
|
|
|
|
Other assets
|
|
|
78
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
122,068
|
|
|
$
|
120,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,775
|
|
|
$
|
1,190
|
|
|
|
|
|
Deferred revenue, current
|
|
|
34,033
|
|
|
|
34,308
|
|
|
|
|
|
Accrued wages and payroll related
|
|
|
10,057
|
|
|
|
9,299
|
|
|
|
|
|
Capital lease obligations, current
|
|
|
450
|
|
|
|
411
|
|
|
|
|
|
Income tax payable
|
|
|
182
|
|
|
|
96
|
|
|
|
|
|
Accrued expenses and other
|
|
|
5,473
|
|
|
|
5,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
51,970
|
|
|
|
50,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
8,349
|
|
|
|
5,969
|
|
|
|
|
|
Capital lease obligations
|
|
|
320
|
|
|
|
230
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
1,465
|
|
|
|
1,135
|
|
|
|
|
|
Other long term liabilities
|
|
|
2,327
|
|
|
|
2,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
64,431
|
|
|
|
60,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities (see Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1,
$0.0001 par value, 10,952,633 shares authorized;
10,952,633 shares issued and outstanding at
December 31, 2010 and March 31, 2011 and no shares
issued and outstanding at March 31, 2011 pro forma
|
|
|
13,541
|
|
|
|
13,666
|
|
|
$
|
|
|
Series A-2,
$0.0001 par value, 11,505,258 shares authorized;
11,505,258 issued and outstanding at December 31, 2010 and
March 31, 2011 and no shares issued and outstanding at
March 31, 2011 pro forma
|
|
|
7,893
|
|
|
|
8,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible redeemable preferred stock
|
|
|
21,434
|
|
|
|
21,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Convertible Preferred Stock, $0.0001 par
value, 5,882,353 shares authorized; 5,882,351 issued and
outstanding at December 31, 2010 and March 31, 2011
and no shares issued and outstanding at March 31, 2011
pro forma
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
Class B convertible common stock, $0.0001 par value,
6,174,654 and 5,625,990 shares authorized; issued and
outstanding: 3,233,288 and 4,945,371 at December 31, 2010
and March 31, 2011 and no shares issued and outstanding at
March 31, 2011 pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock, $0.0001 par value, 144,175,210
and 150,223,874 shares authorized; issued and outstanding:
91,353,635 and 93,509,597 at December 31, 2010 and
March 31, 2011 and no shares issued and outstanding at
March 31, 2011 pro forma
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
Preferred stock, $0.01 par value per share 5,000,000
authorized; no shares issued and outstanding at March 31,
2011 pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock $0.01 par
value, shares
authorized; 126,795,210 issued and outstanding at March 31,
2011 pro forma
|
|
|
|
|
|
|
|
|
|
|
1,268
|
|
Additional paid-in capital
|
|
|
50,501
|
|
|
|
51,115
|
|
|
|
81,540
|
|
Accumulated deficit
|
|
|
(24,147
|
)
|
|
|
(23,488
|
)
|
|
|
(23,488
|
)
|
Accumulated other comprehensive loss
|
|
|
(160
|
)
|
|
|
343
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
36,203
|
|
|
|
37,979
|
|
|
$
|
59,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible redeemable preferred stock, and
stockholders equity
|
|
$
|
122,068
|
|
|
$
|
120,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
F-35
TRUSTWAVE
HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
16,829
|
|
|
$
|
23,448
|
|
Professional services
|
|
|
3,342
|
|
|
|
5,721
|
|
Product sales
|
|
|
1,518
|
|
|
|
2,229
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
21,689
|
|
|
|
31,398
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Service delivery, excluding depreciation and amortization
|
|
|
7,406
|
|
|
|
9,363
|
|
Product sales, excluding depreciation and amortization
|
|
|
273
|
|
|
|
508
|
|
Depreciation and amortization
|
|
|
266
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
7,945
|
|
|
|
10,321
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,744
|
|
|
|
21,077
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Product development
|
|
|
3,744
|
|
|
|
6,194
|
|
Sales and marketing
|
|
|
5,753
|
|
|
|
7,122
|
|
General and administrative
|
|
|
6,491
|
|
|
|
7,002
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,988
|
|
|
|
20,318
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(2,244
|
)
|
|
|
759
|
|
Interest expense, net
|
|
|
(36
|
)
|
|
|
(8
|
)
|
Other (loss) income, net
|
|
|
(106
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(2,386
|
)
|
|
|
769
|
|
Income tax expense
|
|
|
(78
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,464
|
)
|
|
$
|
659
|
|
|
|
|
|
|
|
|
|
|
Cumulative annual preferred dividends
|
|
|
(450
|
)
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders
|
|
$
|
(2,914
|
)
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
79,317,662
|
|
|
|
91,783,570
|
|
Diluted
|
|
|
79,317,662
|
|
|
|
98,215,085
|
|
Pro forma net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
123,566,144
|
|
Diluted
|
|
|
|
|
|
|
130,647,795
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
F-36
TRUSTWAVE
HOLDINGS, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series B
|
|
|
Class B
|
|
|
Class A
|
|
|
Series B
|
|
|
Class B
|
|
|
Class A
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Profit (loss)
|
|
|
Total
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Balance at December 31, 2010
|
|
|
5,882
|
|
|
|
3,233
|
|
|
|
91,354
|
|
|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
50,501
|
|
|
$
|
(24,147
|
)
|
|
$
|
(160
|
)
|
|
$
|
36,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
1,712
|
|
|
|
2,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
Accrued dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
Compensation expense associated with stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
293
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
659
|
|
|
|
|
|
|
|
659
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
|
5,882
|
|
|
|
4,945
|
|
|
|
93,510
|
|
|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
51,115
|
|
|
$
|
(23,488
|
)
|
|
$
|
343
|
|
|
$
|
37,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
F-37
TRUSTWAVE
HOLDINGS, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,464
|
)
|
|
$
|
659
|
|
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,021
|
|
|
|
1,517
|
|
Provision for doubtful accounts
|
|
|
555
|
|
|
|
181
|
|
Loss from disposal of property and equipment
|
|
|
23
|
|
|
|
130
|
|
Inventory provision
|
|
|
|
|
|
|
24
|
|
Non-cash compensation expense
|
|
|
137
|
|
|
|
293
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(2,167
|
)
|
|
|
6,606
|
|
(Increase) decrease in prepaid expenses and other current assets
|
|
|
(210
|
)
|
|
|
(839
|
)
|
Decrease in inventories
|
|
|
60
|
|
|
|
42
|
|
Decrease in other assets
|
|
|
1
|
|
|
|
8
|
|
Decrease (increase) in deferred taxes
|
|
|
1
|
|
|
|
(7
|
)
|
(Decrease) in accounts payable
|
|
|
(667
|
)
|
|
|
(867
|
)
|
Increase (decrease) in income taxes payable
|
|
|
17
|
|
|
|
(87
|
)
|
(Decrease) in accrued expenses
|
|
|
(719
|
)
|
|
|
(725
|
)
|
Increase (decrease) in other long-term liabilities
|
|
|
18
|
|
|
|
(44
|
)
|
(Decrease) in deferred revenue
|
|
|
(1,101
|
)
|
|
|
(2,245
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(5,495
|
)
|
|
|
4,646
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(333
|
)
|
|
|
(882
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
2,410
|
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(6,279
|
)
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(108
|
)
|
|
|
(129
|
)
|
Prepayment of initial public offering costs
|
|
|
|
|
|
|
(252
|
)
|
Proceeds from issuance of stock options
|
|
|
12
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(6,375
|
)
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates on cash flows
|
|
|
(83
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(9,543
|
)
|
|
|
3,934
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
23,916
|
|
|
|
14,558
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
14,373
|
|
|
$
|
18,492
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment under capital leases
|
|
|
167
|
|
|
|
809
|
|
Issuance of stock and stock options in acquisitions of businesses
|
|
|
10,514
|
|
|
|
|
|
Notes payable and capital leases assumed in business combinations
|
|
|
6,299
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
F-38
TRUSTWAVE
HOLDINGS, INC.
(in
thousands, except share and per share data)
The accompanying unaudited Consolidated Financial Statements
include the accounts of Trustwave Holdings, Inc. and
subsidiaries (the Company) in accordance with
accounting principles generally accepted in the United States
(GAAP) and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
All intercompany transactions and balances have been eliminated.
The statements have been prepared in accordance with the
accounting policies described in the Companys
Form S-1
Registration Statement and should be read in conjunction with
the audited Consolidated Financial Statements for the years
ended December 31, 2008, 2009 and 2010 and notes included
therein. These statements do not include all of the information
and footnotes required by GAAP for complete financial
statements. In the opinion of management all material
adjustments (primarily consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial
positions, results of operations and cash flows for the periods
presented have been included and the disclosures herein are
adequate. The results for interim periods are unaudited and not
necessarily indicative of the results that can be expected for a
full year.
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Billed receivables
|
|
$
|
30,512
|
|
|
$
|
22,950
|
|
Unbilled receivables
|
|
|
3,134
|
|
|
|
3,998
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
33,646
|
|
|
|
26,948
|
|
Less: Allowance for doubtful accounts
|
|
|
1,547
|
|
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
32,099
|
|
|
$
|
25,480
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
March, 31
|
|
|
|
2011
|
|
|
Balance at January 1
|
|
$
|
1,547
|
|
Charged to expense
|
|
|
181
|
|
Write-offs, net of recoveries
|
|
|
(260
|
)
|
|
|
|
|
|
Balance at March 31
|
|
$
|
1,468
|
|
|
|
|
|
|
F-39
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Leasehold improvements
|
|
$
|
3,763
|
|
|
$
|
3,708
|
|
Computer equipment
|
|
|
8,800
|
|
|
|
9,607
|
|
Software
|
|
|
1,466
|
|
|
|
1,597
|
|
Office furniture and equipment
|
|
|
1,428
|
|
|
|
1,423
|
|
Equipment under capital lease
|
|
|
1,519
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,976
|
|
|
|
17,854
|
|
Less: Accumulated depreciation
|
|
|
6,750
|
|
|
|
7,400
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets
|
|
$
|
10,226
|
|
|
$
|
10,454
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $447 and $701 in the
three months ending March 31, 2010 and 2011, respectively.
The portion of this expense charged to cost of sales was $146
and $288 in the three months ending March 31, 2010 and
2011, respectively. The remaining amortization expense was
recorded in general and administrative expense.
The changes in the carrying amount of goodwill for the year
ended December 31, 2010 and March 31, 2011 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
EMEA
|
|
|
Total
|
|
|
Balance as of December 31, 2010
|
|
$
|
40,523
|
|
|
$
|
1,527
|
|
|
$
|
42,050
|
|
Foreign currency translation adjustments
|
|
|
482
|
|
|
|
55
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2011
|
|
$
|
41,005
|
|
|
$
|
1,582
|
|
|
$
|
42,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The APAC and LAC segments have no goodwill.
The provision for income tax was $110 on pretax income of $769
for the three months ending March 31, 2011 compared to a
provision of $78 on a pretax loss of $2,386 for the same period
in 2010. The effective income tax rate was 14.3% for the first
quarter of 2011 reflecting the provision for foreign and state
taxes. The effective income tax rate for the first quarter of
2010 was (3.3%) reflecting a provision for foreign and state
taxes.
Accounting guidance requires that the fair value of a liability
for costs associated with an exit or disposal activity be
recognized and measured when the liability is incurred. The
Company has initiated integration plans including workforce
reductions which involve employee severance benefits and
abandonment of excess facilities related to an acquisition.
F-40
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Severance
For the three months ended March 31, 2010, the acquisition
of Intellitactics resulted in severance charges of $669. Cash
payments were made in 2010 and will continue through 2011.
Facilities
Excess facilities charges take into account the fair value of
the future lease obligations of the abandoned space, including
the potential for sublease income. Estimating the amount of
sublease income requires management to make estimates for the
space that will be rented, the rate per square foot that might
be received and the vacancy period of each property. These
estimates could differ materially from actual amounts due to
changes in the real estate markets in which the properties are
located, such as changes in the supply of office space and
prevailing lease rates. Changing market conditions by location
and considerable work with third-party leasing companies require
us to periodically review each lease and change the
Companys estimates on a prospective basis, as necessary.
In December 2010, the Company abandoned its facility in
Carlsbad, California. The Company recorded a lease abandonment
accrual for $450 and facility impairment costs for $98. The
lease abandonment accrual is net of $107 in estimated sublease
income.
The table below summarizes both the severance and facilities
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Accrued
|
|
|
|
|
|
|
Severance
|
|
|
Facilities
|
|
|
|
|
|
|
Costs
|
|
|
Costs
|
|
|
Total
|
|
|
Balance at December 31, 2010
|
|
$
|
226
|
|
|
$
|
450
|
|
|
$
|
676
|
|
Cash payments
|
|
|
(154
|
)
|
|
|
(87
|
)
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
$
|
72
|
|
|
$
|
363
|
|
|
$
|
435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Both office integration and severance pay expenses were recorded
in general and administrative expense on the consolidated
statements of operations and in accrued expenses and other on
the consolidated balance sheets. These expenses were only
incurred in the North America business segment.
The Company adopted the Trustwave Stock Incentive Plan (the
Plan) in May 2001. Under the Plan, the Company may
grant incentive stock options, non-qualified stock options and
shares of common stock to officers, directors, employees and
others. The Company issues new shares of stock upon the exercise
of stock options. Options may be granted that are exercisable
into either Class A or Class B common stock. The
Board, at its sole discretion, determines the price of the
shares subject to an option on the date of the grant. Generally,
these options vest and become exercisable over a period of four
years and the exercise price is set at the grant-date fair
market value of Companys stock, as determined by a
third-party appraisal. Options awarded under the Plan may carry
a term of up to 10 years from the grant date.
The Board has reserved 27,655,957 shares of the
Companys stock for the Plan as of March 31, 2011. The
compensation cost charged against income for the Plan was
approximately $137 and $293 in the three months ending
March 31, 2010 and 2011, respectively. The Company did not
realize any current tax benefits related to the exercise of
stock options.
F-41
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of stock options for Class A common stock
granted in the three months ended March 31, 2010 and 2011
is calculated based on the estimated present value at grant date
using the Black-Scholes option pricing model that uses
assumptions in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility
|
|
|
32.4
|
%
|
|
|
41.1
|
%
|
Risk-free interest rate
|
|
|
3.28
|
%
|
|
|
2.47
|
%
|
Weighted-average expected option life (in years)
|
|
|
6.1
|
|
|
|
6.0
|
|
Weighted-average grant-date fair value of options
|
|
$
|
0.44
|
|
|
$
|
1.25
|
|
Total intrinsic value of options exercised
|
|
$
|
37
|
|
|
$
|
10,607
|
|
The dividend yield was based on the Companys policy of not
paying dividends, which we expect to continue in the future. The
volatility assumption is based on implied and historical stock
price volatility of a peer group of publicly traded companies.
The risk-free interest rate assumption is based on United States
Treasury instruments. The expected life was estimated using the
simplified method for all options in all periods as the Company
does not have sufficient historical exercise data.
F-42
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity of the
Companys stock option plan:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding beginning of period
|
|
|
14,247,738
|
|
|
$
|
0.53
|
|
Granted at fair value
|
|
|
|
|
|
|
|
|
Class A
|
|
|
3,774,000
|
|
|
|
2.89
|
|
Class B
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Class A
|
|
|
(2,155,962
|
)
|
|
|
0.21
|
|
Class B
|
|
|
(1,712,083
|
)
|
|
|
0.07
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Class A
|
|
|
(54,385
|
)
|
|
|
1.71
|
|
Class B
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
Class A
|
|
|
(47,745
|
)
|
|
|
0.73
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period
|
|
|
14,051,563
|
|
|
$
|
1.26
|
|
Class A
|
|
|
13,370,944
|
|
|
$
|
1.32
|
|
Class B
|
|
|
680,619
|
|
|
$
|
0.13
|
|
Exercisable at end of period
|
|
|
6,996,390
|
|
|
|
0.50
|
|
Options vested and expected to vest at March 31,
2011(1)
|
|
|
12,822,626
|
|
|
|
1.18
|
|
|
|
|
(1)
|
|
Options vested and expected to vest
reflect the Companys estimated forfeiture rates.
|
As of March 31, 2011 total compensation costs related to
unvested stock option grants not yet recognized was $4,690, to
be recognized over 1.7 years. Total cash received from
exercises of share options was $12 and $571 in the three months
ended March 31, 2010 and 2011, respectively. Due to the
accumulated net operating losses, the Company did not realize
any tax benefits for the exercise of stock options.
|
|
9.
|
Net
(Loss) Income per Share
|
Basic net (loss) income per common share is calculated by
dividing net (loss) income available to common stockholders by
the weighted average Class A common stock outstanding for
the period. Diluted net (loss) income per common share is
calculated by dividing net (loss) income by the weighted average
number of Class A common shares outstanding for the period
plus amounts representing the dilutive effect of stock options
on Class A common, warrants, restricted stock and convertible
preferred stock, as applicable. Preferred dividends were added
to net (loss) income in arriving at net (loss) income
attributable to common shareholders. The Company calculates
basic
F-43
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
net (loss) income and diluted net (loss) income per common share
using the treasury stock method, the as-if-converted method, and
the two-class method, as applicable.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Net (loss) income available to common stockholders
|
|
|
(2,464
|
)
|
|
|
659
|
|
Less: Undeclared preferred dividends
|
|
|
(450
|
)
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
|
(2,914
|
)
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
79,317,662
|
|
|
|
91,783,570
|
|
Dilutive effect of stock options on Class A common and
warrants
|
|
|
|
|
|
|
6,431,515
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average common shares outstanding
|
|
|
79,317,662
|
|
|
|
98,215,085
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per common share
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per common share
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
A total of 107,639 warrants with exercise prices that exceed the
weighted average fair market value of the underlying stock for
the three months ended March 31, 2011 and 28,340,242
convertible preferred shares were excluded from the calculation
of diluted earnings per share because of their antidilutive
effect. Since the conditions for conversion of Class B
common to Class A common have not been met,
4,945,371 shares and 680,619 options of Class B
common were also excluded from the calculation.
Due to the Companys loss position in the three months
ended March 31, 2010, the impacts of preferred stock,
options on Class A common, and warrants were excluded from
the calculation of diluted earnings per share because the
effects are antidilutive. Since the conditions for conversion of
Class B common to Class A common have not been met,
shares and options of Class B common were also excluded
from the calculation. The following instruments may have a
dilutive effect in future periods:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
Stock options outstanding
|
|
|
14,476,104
|
|
Stock warrants outstanding
|
|
|
1,140,103
|
|
Convertible preferred shares
|
|
|
28,340,242
|
|
Class B common stock
|
|
|
2,965,752
|
|
Unaudited
Pro Forma Net Loss Per Share
Unaudited pro forma basic and diluted net income per common
share for the three months ended March 31, 2011 have been
computed to give effect to the conversion of Series A-1,
Series A-2, Series B convertible preferred and
Class B common stock as though the conversion had occurred
as of January 1, 2011.
The Company conducts its business in four geographic operating
segments. The results of these geographic operating segments are
reviewed regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The four operating segments are North America, EMEA, APAC and
LAC. The products and services from which each operating segment
derives its revenues are similar and include both
F-44
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compliance management and compliance enablement solutions.
Revenues are attributed to a geographic area based on the
location of the customer.
The Company defines Adjusted EBITDA, a non-GAAP financial
measure, as net income (loss) before income tax expense
(benefit), depreciation and amortization, net interest expense,
stock-based compensation, gain (loss) on foreign currency
exchange, severance and transition costs, and acquisition,
transaction and integration expenses. The Company reports
segment results in a manner consistent with managements
internal reporting of operating results to the chief operating
decision maker (Chief Executive Officer) for purposes of
evaluating segment performance and allocating resources.
Adjusted EBITDA is not a measure of financial performance under
GAAP. Items excluded from Adjusted EBITDA are significant
components in understanding and assessing financial performance.
Adjusted EBITDA should not be considered in isolation or as an
alternative to, or substitute for, net income, net change in
cash and cash equivalents or other financial statement data
presented in the consolidated financial statements as indicators
of financial performance or liquidity. Because Adjusted EBITDA
is not a measurement determined in accordance with GAAP and thus
is susceptible to varying calculations, Adjusted EBITDA as
presented may not be comparable to other similarly titled
measures of other companies.
Items that apply to the Company as a whole (such as corporate
expenses) are included in the North America operating segment.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
18,334
|
|
|
$
|
25,016
|
|
EMEA
|
|
|
2,723
|
|
|
|
5,371
|
|
LAC
|
|
|
363
|
|
|
|
551
|
|
APAC
|
|
|
269
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,689
|
|
|
$
|
31,398
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
964
|
|
|
$
|
1,439
|
|
EMEA
|
|
|
57
|
|
|
|
71
|
|
LAC
|
|
|
|
|
|
|
7
|
|
APAC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,021
|
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
|
|
F-45
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
(162
|
)
|
|
$
|
2,931
|
|
EMEA
|
|
|
189
|
|
|
|
265
|
|
LAC
|
|
|
(256
|
)
|
|
|
(556
|
)
|
APAC
|
|
|
(381
|
)
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
Total Adjusted EBITDA
|
|
$
|
(610
|
)
|
|
$
|
2,537
|
|
Taxes
|
|
|
(78
|
)
|
|
|
(110
|
)
|
Depreciation and amortization
|
|
|
(1,021
|
)
|
|
|
(1,517
|
)
|
Interest expense, net
|
|
|
(36
|
)
|
|
|
(8
|
)
|
Stock compensation expense
|
|
|
(137
|
)
|
|
|
(293
|
)
|
Foreign currency exchange (losses) gains
|
|
|
(84
|
)
|
|
|
50
|
|
Severance and transition costs
|
|
|
(350
|
)
|
|
|
|
|
Acquisition, transaction and integration expenses
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,464
|
)
|
|
$
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
108,985
|
|
|
$
|
104,169
|
|
EMEA
|
|
|
8,900
|
|
|
|
11,321
|
|
LAC
|
|
|
2,312
|
|
|
|
2,185
|
|
APAC
|
|
|
1,871
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
122,068
|
|
|
$
|
120,175
|
|
|
|
|
|
|
|
|
|
|
In February 2011, the Company restructured its operations in
Europe and transferred total assets of $189 from its North
America segment to EMEA.
Class A
Voting Common Stock
The holders of Class A common stock are entitled to receive
dividends, when and as declared by the Board of Directors, and
to vote on all matters entitled to be voted on by the
stockholders of the Company.
Class B
Non-voting Convertible Common Stock
The holders of Class B common stock are not entitled to
receive dividends or to vote on any Company matters.
Class B common shares automatically convert to Class A
shares on a 1:1 ratio upon the occurrence of liquidation,
dissolution, or winding up of the Company subject to certain
qualifications, or on the closing of the sale of shares of
Class A common stock in an underwritten public offering
subject to certain qualifications.
Unaudited
Pro Forma Financial Information of Class B Non-Voting
Convertible Common Stock
The unaudited pro forma balance sheet as of March 31, 2011
presented in the accompanying financial statements reflects the
conversion of all outstanding 4,945,371 shares of
Class B common stock into the same
F-46
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
number of newly-authorized shares of common stock, which will
occur prior to the completion of an initial public offering.
Series B
Convertible Preferred Stock
In June 2008, the Company issued the Series B shares of
preferred stock (Series B Preferred) and as of
December 31, 2010 and March 31, 2011 there were
5,882,353 shares issued and outstanding. Series B
Preferred ranks senior to Class A and B common stock and
junior to
Series A-1
and A-2
preferred stock as to dividends and upon liquidation,
dissolution or winding up. Each Series B Preferred holder
is entitled to voting rights equivalent to those votes which the
holder would have as a Class A common stock holder upon
conversion.
Series B Preferred shares are entitled to a liquidation
preference equal to the original purchase price plus any
Series B Preferred accrued unpaid dividends, less any
participating dividends received. As of December 31, 2010
and March 31, 2011, the liquidation preference of
Series B Preferred was $12,041 and $12,241, respectively.
The holders of the Series B Preferred shares are entitled
to receive cumulative annual dividends at an annual rate of 8.0%
on the original issuance price. Such dividends are payable only
upon liquidation, dissolution or winding up of the Company or
when declared by the Board of Directors. Participating dividends
may also be paid to Series B Preferred holders to the
extent dividends are paid to common stockholders. For 2009, the
presentation of the Series B Preferred shares has been
revised to record previously recorded accreted, unpaid,
undeclared dividends as additional paid in capital.
Each share of Series B Preferred is convertible, at the
option of the holder, into Class A common stock at any time
at a conversion ratio of 1 to 1. The conversion ratio is subject
to adjustment for events such as a stock split or stock
dividend. All of the Series B Preferred shares outstanding
shall automatically be converted into shares of Class A
common stock upon the closing of the sales of shares of
Class A common stock pursuant to an underwritten public
offering.
Unaudited
Pro Forma Financial Information of Series B Convertible
Preferred Stock
The unaudited pro forma balance sheet as of March 31, 2011
presented in the accompanying financial statements reflects the
conversion of all outstanding 5,882,353 shares of
Series B convertible preferred stock into the same number
of newly-authorized shares of common stock, which will occur
prior to the completion of an initial public offering.
|
|
12.
|
Convertible
Redeemable Preferred Stocks
|
The Companys authorized convertible redeemable preferred
stock as of December 31, 2010 and March 31, 2011
consists of 22,457,891 shares of preferred stock, par value
$0.0001 of which 10,952,633 are designated as
Series A-1
preferred stock and 11,505,258 shares are designated as
Series A-2
preferred stock.
Series A-1
Convertible Redeemable Preferred Stock
At December 31, 2010 and March 31, 2011 there were
10,952,633 shares of
Series A-1
preferred stock
(Series A-1)
issued and outstanding.
Series A-1 shares
rank senior to common stock and Series B Preferred stock of
the Company as to dividends and upon liquidation, dissolution or
winding up. Each
Series A-1
holder is entitled to voting rights equivalent to those votes
which the holder would have as a Class A common stock
holder upon conversion.
Series A-1 shares
are entitled to a liquidation preference equal to the original
purchase price plus any
Series A-1
accrued unpaid dividends, less any participating dividends
received. As of December 31, 2010 and March 31, 2011,
the liquidation preference of
Series A-1
was $13,541 and $13,666, respectively.
F-47
TRUSTWAVE
HOLDINGS, INC.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At any time on or after April 8, 2009, all of the
outstanding shares of
Series A-1
preferred stock can be redeemed at the written request of the
holders of
662/3%
of the
Series A-1
preferred stock at an amount equal to the liquidation preference.
The holders of the
Series A-1 shares
are entitled to receive cumulative annual dividends at the rate
of $0.045651 per each share. Such dividends are payable upon
liquidation, dissolution or winding up of the Company,
redemption of
Series A-1,
or when declared by the Board of Directors. Participating
dividends may also be paid to
Series A-1
holders to the extent dividends are paid to common stockholders.
Each share of
Series A-1
is convertible, at the option of the holder, into Class A
common stock at any time at a conversion ratio of 1 to 1. The
conversion ratio is subject to adjustment for events such as a
stock split or stock dividend. All
Series A-1 shares
outstanding shall automatically be converted into shares of
Class A common stock at the then effective conversion
price, upon a vote of
662/3%
of the Series A preferred stockholders to do so, or upon
the closing of the sales of shares to Class A common stock
pursuant to an underwritten public offering.
Unaudited
Pro Forma Financial Information of
Series A-1
Convertible Redeemable Preferred Stock
The unaudited pro forma balance sheet as of March 31, 2011
presented in the accompanying financial statements reflects the
conversion of all outstanding 10,952,633 shares of
Series A-1
convertible redeemable preferred stock into the same number of
newly-authorized shares of common stock, which will occur prior
to the completion of an initial public offering.
Series A-2
Convertible Redeemable Preferred Stock
At December 31, 2010 and March 31, 2011 there were
11,505,258 shares of
Series A-2
preferred stock
(Series A-2)
issued and outstanding.
Series A-2
has the same rights, privileges and restrictions as
Series A-1,
except the annual dividend per share is $0.043458. As of
December 31, 2010 and March 31, 2011, the liquidation
preference of
Series A-2
was $7,893 and $8,018, respectively.
Unaudited
Pro Forma Financial Information of
Series A-2
Convertible Redeemable Preferred Stock
The unaudited pro forma balance sheet as of March 31, 2011
presented in the accompanying financial statements reflects the
conversion of all outstanding 11,505,258 shares of
Series A-2
convertible redeemable preferred stock into the same number of
newly-authorized shares of common stock, which will occur prior
to the completion of an initial public offering.
|
|
13.
|
Commitments
and Contingent Liabilities
|
The Company is involved in various legal proceedings in the
normal course of business. It is managements opinion,
after consultation with counsel and a review of the facts, that
the ultimate liability, if any, arising from such contingencies
will not have any material adverse effect on the Companys
financial position and results of operations.
F-48
REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Intellitactics, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of
Intellitactics, Inc. and Subsidiary (a Delaware corporation) as
of February 28, 2010, December 31, 2009 and 2008, and
the related consolidated statements of operations,
stockholders deficit, and cash flows for the period from
January 1, 2010 through February 28, 2010 and the
years ended December 31, 2009 and 2008. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America as
established by the American Institute of Certified Public
Accountants. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Intellitactics, Inc. and Subsidiary as of
February 28, 2010, December 31, 2009 and 2008, and the
results of their operations and their cash flows for the period
from January 1, 2010 through February 28, 2010 and the
years ended December 31, 2009 and 2008 in conformity with
accounting principles generally accepted in the United States of
America.
McLean, Virginia
December 3, 2010
F-49
INTELLITACTICS,
INC., AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,301,988
|
|
|
$
|
2,046,302
|
|
|
$
|
3,002,279
|
|
Accounts receivable, net of allowance of $65,000, $45,000 and
$67,000, respectively
|
|
|
2,601,177
|
|
|
|
5,744,382
|
|
|
|
5,252,479
|
|
Prepaid expenses and other current assets
|
|
|
280,114
|
|
|
|
300,096
|
|
|
|
501,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
5,183,279
|
|
|
|
8,090,780
|
|
|
|
8,756,417
|
|
Property and equipment, net
|
|
|
359,840
|
|
|
|
392,150
|
|
|
|
525,847
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
62,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,543,119
|
|
|
$
|
8,482,930
|
|
|
$
|
9,344,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable current
|
|
|
5,333,333
|
|
|
|
5,922,346
|
|
|
|
|
|
Capital lease obligations current
|
|
|
9,597
|
|
|
|
9,527
|
|
|
|
7,494
|
|
Accounts payable
|
|
|
406,311
|
|
|
|
356,261
|
|
|
|
215,622
|
|
Accrued liabilities
|
|
|
2,050,370
|
|
|
|
1,695,892
|
|
|
|
1,603,738
|
|
Deferred revenue current
|
|
|
5,126,604
|
|
|
|
6,789,679
|
|
|
|
5,094,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
12,926,215
|
|
|
|
14,773,705
|
|
|
|
6,921,631
|
|
Notes payable net of current portion
|
|
|
|
|
|
|
|
|
|
|
5,776,745
|
|
Capital lease obligation net of current portion
|
|
|
11,409
|
|
|
|
13,163
|
|
|
|
19,467
|
|
Deferred revenue, net of current portion
|
|
|
581,451
|
|
|
|
703,834
|
|
|
|
1,306,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
13,519,075
|
|
|
|
15,490,702
|
|
|
|
14,024,557
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Redeemable convertible preferred stock, $.001 par
value; 2,157,632 shares authorized, issued and outstanding
|
|
|
11,499,711
|
|
|
|
11,401,170
|
|
|
|
10,791,554
|
|
Series C Redeemable convertible preferred stock, $.001 par
value; 326,709 shares authorized, issued and outstanding
|
|
|
923,084
|
|
|
|
923,084
|
|
|
|
923,084
|
|
Series D Redeemable convertible preferred stock, $.001 par
value; 6,200,331 shares authorized, issued and outstanding
|
|
|
11,289,178
|
|
|
|
11,181,296
|
|
|
|
10,513,893
|
|
Series E Redeemable convertible preferred stock, $.001 par
value; 2,478,648 shares authorized, issued and outstanding
|
|
|
5,806,909
|
|
|
|
5,755,183
|
|
|
|
5,435,190
|
|
Series F Redeemable convertible preferred stock, $.001 par
value; 2,481,859 shares authorized, 1,996,893 shares
issued and outstanding
|
|
|
4,863,576
|
|
|
|
4,813,791
|
|
|
|
4,505,791
|
|
Series G Redeemable convertible preferred stock,
$.001 par value; 898,614 shares authorized,
855,823 shares issued and outstanding
|
|
|
1,585,051
|
|
|
|
1,565,655
|
|
|
|
1,445,655
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock $0.001 par value; 25,000,000 shares
authorized; 1,282,247, 1,282,247 and 1,281,247 shares
issued and outstanding, respectively
|
|
|
1,282
|
|
|
|
1,282
|
|
|
|
1,281
|
|
Additional paid-in capital
|
|
|
811,370
|
|
|
|
819,975
|
|
|
|
812,871
|
|
Accumulated deficit
|
|
|
(44,300,993
|
)
|
|
|
(43,018,027
|
)
|
|
|
(38,822,066
|
)
|
Accumulated other comprehensive loss
|
|
|
(455,124
|
)
|
|
|
(451,181
|
)
|
|
|
(287,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Deficit
|
|
|
(43,943,465
|
)
|
|
|
(42,647,951
|
)
|
|
|
(38,295,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Deficit
|
|
$
|
5,543,119
|
|
|
$
|
8,482,930
|
|
|
$
|
9,344,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-50
INTELLITACTICS,
INC., AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
from January 1,
|
|
|
|
|
|
|
|
|
|
2010 through
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
864,055
|
|
|
$
|
5,031,862
|
|
|
$
|
5,941,709
|
|
Maintenance and consulting services
|
|
|
1,396,336
|
|
|
|
7,991,111
|
|
|
|
7,330,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
2,260,391
|
|
|
|
13,022,973
|
|
|
|
13,271,995
|
|
Direct Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
79,190
|
|
|
|
1,144,407
|
|
|
|
506,464
|
|
Maintenance and consulting services
|
|
|
319,766
|
|
|
|
1,913,797
|
|
|
|
1,935,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Costs
|
|
|
398,956
|
|
|
|
3,058,204
|
|
|
|
2,441,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
1,861,435
|
|
|
|
9,964,769
|
|
|
|
10,830,313
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development
|
|
|
497,924
|
|
|
|
2,797,739
|
|
|
|
3,671,822
|
|
Sales and marketing
|
|
|
628,889
|
|
|
|
5,480,209
|
|
|
|
6,808,513
|
|
Administrative expenses
|
|
|
1,758,896
|
|
|
|
2,819,672
|
|
|
|
2,758,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,024,274
|
)
|
|
|
(1,132,851
|
)
|
|
|
(2,408,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(122,749
|
)
|
|
|
(718,002
|
)
|
|
|
(571,441
|
)
|
Other income (expense)
|
|
|
191,387
|
|
|
|
(320,096
|
)
|
|
|
422,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
68,638
|
|
|
|
(1,038,098
|
)
|
|
|
(149,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(955,636
|
)
|
|
$
|
(2,170,949
|
)
|
|
$
|
(2,557,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-51
INTELLITACTICS,
INC., AND SUBSIDIARY
For the Period January 1, 2010 Through
February 28, 2010 and
The Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amounts
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Total
|
|
|
Balance at January 1, 2008
|
|
|
1,277,956
|
|
|
$
|
1,278
|
|
|
$
|
749,430
|
|
|
$
|
(34,338,505
|
)
|
|
$
|
(361,607
|
)
|
|
$
|
(33,949,404
|
)
|
Exercise of options
|
|
|
3,291
|
|
|
|
3
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
362
|
|
Dividends and accretion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,926,011
|
)
|
|
|
|
|
|
|
(1,926,011
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,556
|
|
|
|
|
|
|
|
|
|
|
|
7,556
|
|
Issue of stock warrants
|
|
|
|
|
|
|
|
|
|
|
55,526
|
|
|
|
|
|
|
|
|
|
|
|
55,526
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,557,550
|
)
|
|
|
|
|
|
|
(2,557,550
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,376
|
|
|
|
74,376
|
|
Total Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,483,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
1,281,247
|
|
|
|
1,281
|
|
|
|
812,871
|
|
|
|
(38,822,066
|
)
|
|
|
(287,231
|
)
|
|
|
(38,295,145
|
)
|
Exercise of options
|
|
|
1,000
|
|
|
|
1
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
Dividends and accretion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,025,012
|
)
|
|
|
|
|
|
|
(2,025,012
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,015
|
|
|
|
|
|
|
|
|
|
|
|
7,015
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,170,949
|
)
|
|
|
|
|
|
|
(2,170,949
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163,950
|
)
|
|
|
(163,950
|
)
|
Total Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,334,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
1,282,247
|
|
|
$
|
1,282
|
|
|
$
|
819,975
|
|
|
$
|
(43,018,027
|
)
|
|
$
|
(451,181
|
)
|
|
$
|
(42,647,951
|
)
|
Dividends and accretion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(327,330
|
)
|
|
|
|
|
|
|
(327,330
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
6,395
|
|
|
|
|
|
|
|
|
|
|
|
6,395
|
|
Settlement of stock warrants
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(955,636
|
)
|
|
|
|
|
|
|
(955,636
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,943
|
)
|
|
|
(3,943
|
)
|
Total Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(959,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2010
|
|
|
1,282,247
|
|
|
$
|
1,282
|
|
|
$
|
811,370
|
|
|
$
|
(44,300,993
|
)
|
|
$
|
(455,124
|
)
|
|
$
|
(43,943,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-52
INTELLITACTICS,
INC., AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
from January 1,
|
|
|
|
|
|
|
|
|
|
2010 through
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(955,636
|
)
|
|
$
|
(2,170,949
|
)
|
|
$
|
(2,557,550
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
42,630
|
|
|
|
302,567
|
|
|
|
273,057
|
|
Amortization of debt discount
|
|
|
77,654
|
|
|
|
145,601
|
|
|
|
137,370
|
|
Stock-based compensation
|
|
|
6,395
|
|
|
|
7,015
|
|
|
|
7,556
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,143,205
|
|
|
|
(491,903
|
)
|
|
|
(115,694
|
)
|
Prepaid expenses and other assets
|
|
|
19,982
|
|
|
|
263,878
|
|
|
|
(271,023
|
)
|
Accounts payable
|
|
|
50,050
|
|
|
|
140,639
|
|
|
|
(75,984
|
)
|
Accrued liabilities
|
|
|
354,478
|
|
|
|
92,154
|
|
|
|
319,680
|
|
Deferred revenue
|
|
|
(1,785,458
|
)
|
|
|
1,092,022
|
|
|
|
864,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
953,300
|
|
|
|
(618,976
|
)
|
|
|
(1,418,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(11,470
|
)
|
|
|
(201,900
|
)
|
|
|
(377,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(11,470
|
)
|
|
|
(201,900
|
)
|
|
|
(377,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt obligations
|
|
|
|
|
|
|
|
|
|
|
1,038,690
|
|
Payment of debt obligations
|
|
|
(666,667
|
)
|
|
|
|
|
|
|
|
|
Payment of capital lease obligations
|
|
|
(1,684
|
)
|
|
|
(4,271
|
)
|
|
|
(13,084
|
)
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
1,429,874
|
|
Payment to cancel stock warrants
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
90
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used in) Provided by Financing Activities
|
|
|
(683,351
|
)
|
|
|
(4,181
|
)
|
|
|
2,455,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate on Cash
|
|
|
(2,793
|
)
|
|
|
(130,920
|
)
|
|
|
79,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash
|
|
|
255,686
|
|
|
|
(955,977
|
)
|
|
|
739,631
|
|
Cash, beginning of year
|
|
|
2,046,302
|
|
|
|
3,002,279
|
|
|
|
2,262,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
2,301,988
|
|
|
$
|
2,046,302
|
|
|
$
|
3,002,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-53
Note A
Summary of Significant Accounting Policies
Nature
of Operations and Basis of Presentation
Intellitactics, Inc. (Intellitactics US), was incorporated in
Delaware on March 20, 2003, as part of the reorganization
with its Canada-based subsidiary Intellitactics, Inc.
(Intellitactics Canada) (collectively the Company). The Company
develops, markets, and supports enterprise security management
software (ISM), which enables its customers to identify
information security incidents, deploy resources to the threats
that pose risks to the business, and assess and resolve such
incidents on an enterprise-wide basis. Headquartered in Reston,
Virginia, the Company markets ISM and its other products to
companies, government organizations, and managed security
service providers throughout the United States and abroad.
The accompanying consolidated financial statements include the
accounts of Intellitactics US and its subsidiary, Intellitactics
Canada. All significant intercompany transactions and balances
have been eliminated.
Effective March 1, 2010 the Company was acquired by
Trustwave Holdings, Inc. (Trustwave). The accompanying
consolidated financial statements include the financial position
and operations of the Company through the effective date of the
transaction.
Cash
and Cash Equivalents
The Company considers all highly liquid securities with an
original maturity of three months or less to be cash equivalents.
Cash held in foreign financial institutions was approximately
$71,000, $180,000 and $73,000 as of February 28, 2010,
December 31, 2009 and December 31, 2008, respectively.
Revenue
Recognition
The Company derives revenue primarily from software licenses,
maintenance support, and consulting and development services.
License revenue is recognized upon delivery, when the license
fee is fixed and determinable and collection is reasonably
assured.
Revenue recognized from multiple-element software arrangements
is allocated to each element of an arrangement based on vendor
specific objective evidence of the fair value (VSOE)
of the element. The VSOE of maintenance support has been
determined based upon the optional stated renewal fee for
maintenance support in the contract, which is the price the
customer is required to pay when maintenance support is renewed
(sold separately) from software. As such, revenue is recognized
under the residual method for arrangements in which licenses are
sold with maintenance support, provided that all other
applicable revenue recognition criteria have been met.
Maintenance support is provided, including product enhancements
and updates, for fees which are payable annually. Customers
generally prepay for an annual maintenance period. These
prepayments are recorded as deferred revenue and recognized
ratably over the contract period.
Revenue for consulting and development services is recognized as
services are performed. The Company expenses anticipated losses
on contracts in the period in which the losses become probable
and reasonably estimable. Prepayments for consulting or training
services are recorded as deferred revenue and recognized when
earned.
Sales taxes collected from customers are excluded from revenues.
The obligation is included in accounts payable until the taxes
are paid.
F-54
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Revenue and Advance Payments
Deferred revenue and advance payments related to product support
and other services result from payments received prior to the
performance of services for consulting and technical support.
Deferred revenue is comprised of deferred product licenses or
deferred product support and other services revenue based on the
VSOE of the elements of the arrangement, except for software
licenses for which the Company does not have VSOE.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable are generally due between 30 and
60 days and are stated at amounts due from customers net of
an allowance for doubtful accounts. Accounts outstanding longer
than the contractual payment terms are considered past due.
Credit is extended based on evaluation of a customers
financial condition and collateral is not required. The Company
determines its allowance for doubtful accounts by considering a
number of factors, including the number of days trade accounts
receivable are past due, the Companys previous loss
history and the customers current ability to pay its
obligation to the Company. The Company writes off accounts
receivable when they become uncollectible. Any payments
subsequently received on such receivables are credited to the
allowance for doubtful accounts.
Property
and Equipment
Property and equipment are recorded at cost and are depreciated
using the straight-line method over estimated useful lives
ranging from three to seven years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the
economic life or the lease term.
Foreign
Currency Transactions
The functional currency of the Companys Canadian
operations is the local currency. Accordingly, all assets and
liabilities of the subsidiary are translated using exchange
rates in effect at the end of the period and revenue and costs
are translated using weighted average exchange rates for the
period. The related translation adjustments are reported in
accumulated other comprehensive income (loss) in
stockholders deficit. Transaction gains and losses arising
from transactions denominated in a currency other than the
functional currency of the entity involved are included in the
results of operations.
Transaction gains and losses arising from transactions
denominated in foreign currencies resulted in a nominal loss for
the period from January 1, 2010 through February 28,
2010, a net loss of approximately $164,000 in 2009 and a net
gain of approximately $74,000 in 2008 and are included in other
income (expense) in the accompanying consolidated statements of
operations.
Software
Development Costs
Development costs relating to new software products and
enhancements to existing products are expensed as incurred until
technological feasibility has been established, after which
additional costs are capitalized. There were no software costs
capitalized for the period from January 1, 2010 through
February 28, 2010, or the years ended December 31,
2009 and December 31, 2008, as the costs incurred between
technological feasibility and general availability were not
significant.
Income
Taxes
Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred
tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are
expected to be recovered or settled. The Company evaluates its
ability to benefit from all deferred tax assets and establishes
valuation allowances for amounts it believes may not be
realizable.
F-55
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 1, 2009, the Company adopted a new accounting
standard which provides guidance on accounting for uncertain tax
positions. The guidance prescribes a recognition threshold that
a tax position is required to meet before recognition in the
financial statements and provides guidance on de-recognition,
measurement, classification, interest and penalties, disclosure
and transitional issues. The adoption of the guidance did not
have a material effect on the Companys financial
statements.
The Company recognizes financial statement effects of a tax
position when it is more likely than not, based on the technical
merits, that the position will be sustained upon examination by
a taxing authority. Recognized tax positions are initially and
subsequently measured as the largest amounts of tax benefit that
is more than 50 percent likely of being realized upon
settlement with a taxing authority that has full knowledge of
all relevant information. The Company has chosen to treat
interest and penalties related to uncertain tax liabilities as
income tax expense.
Advertising
Costs
Advertising costs are expensed as incurred and included in sales
and marketing expenses. Advertising costs for the period from
January 1, 2010 through February 28, 2010 were not
significant. Advertising costs for the years ended
December 31, 2009 and 2008 were approximately $30,000 and
$21,000, respectively.
Stock-Based
Compensation
Share-based payment arrangements are measured at estimated fair
value. The Company has elected to use the Black-Scholes-Merton
option pricing model to value any options granted and to
recognize the compensation expense relating to share-based
payments on a straight-line basis over the requisite service
period.
Fair
Value of Measurements
The Company applies fair value accounting for all financial
assets and liabilities and non-financial assets and liabilities
that are recognized or disclosed at fair value in the financial
statements on a recurring and nonrecurring basis. The Company
defines fair value as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value measurements for assets and
liabilities, which are required to be recorded at fair value,
the Company considers the principal or most advantageous market
in which the Company would transact and the market-based risk
measurements or assumptions that market participants would use
in pricing the asset or liability, such as inherent risk,
transfer restrictions and credit risk.
The Company applies the following fair value hierarchy, which
prioritizes the inputs used to measure fair value into three
levels and bases the categorization within the hierarchy upon
the lowest level of input that is available and significant to
the fair value measurement:
Level 1 Quoted prices in active markets
for identical assets or liabilities.
Level 2 Observable inputs other than
quoted prices in active markets for identical assets and
liabilities, quoted prices for identical or similar assets or
liabilities in inactive markets, or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 Inputs that are generally
unobservable and typically reflect managements estimates
of assumptions that market participants would use in pricing the
asset or liability.
Financial instruments are defined as cash or contracts that
impose an obligation to deliver cash or other financial
instruments to a second party. Accounts receivable and accounts
payable are considered to be recorded at fair value given their
short maturities, and the carrying amounts of notes payable
approximate fair value as the interest rates on such notes are
considered to be at market.
F-56
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of
Estimates
The preparation of the consolidated financial statements, in
conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and reported amounts of
revenue and expenses during the period. On an on-going basis,
the Company evaluates its significant estimates, including but
not limited to, those related to those assumptions and estimates
used in the determination of fair value for revenue recognition
and share-based payments. The Company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates.
Impairment
of Long-Lived Assets
Whenever events or changes in circumstances indicate that the
carrying amount of long-lived assets may not be fully
recoverable, the Company evaluates the probability that future
undiscounted net cash flows, without interest charges, will be
less than the carrying amount of the assets. If any impairment
is indicated as a result of this analysis, the Company would
recognize a loss based on the amount by which the carrying
amount exceeds the estimated fair value of such asset.
Recently
Issued Accounting Pronouncements
Revenue Arrangements with Multiple
Deliverables. In October 2009, the FASB revised
the accounting guidance pertaining to revenue arrangements with
multiple deliverables. Prior to this guidance, in order for
deliverables within an arrangement to be separated, the items
must have stand-alone value as defined by the statement and
there must be objective and reliable evidence of fair value for
all elements or at a minimum the undelivered elements within the
arrangement. Objective and reliable evidence of fair value meant
there was vendor-specific-objective-evidence (VSOE) of fair
value, which consisted of the price charged when the deliverable
is sold separately or a price established by management with the
authority to establish the price for the item before it is to be
sold separately. Or if VSOE did not exist, third-party evidence
was also acceptable. The new standard allows for the use of an
estimated management selling price to determine the value of
deliverables within an arrangement when VSOE or third-party
evidence does not exist. The new guidance also eliminates the
use of the residual method of allocation allowed in the previous
guidance. The guidance will be effective for the Company
beginning January 1, 2011. While the Company occasionally
may enter into software arrangements falling outside the scope
of software revenue recognition guidance, the adoption of this
guidance is not expected to have a material impact on the
Companys financial condition or results of operations.
Subsequent
Events
The Company evaluated its financial statements for subsequent
events through December 3, 2010, the date the financial
statements were available to be issued. The Company is not aware
of any subsequent events which would require recognition or
disclosure in the financial statements, other than the
transaction discussed with Trustwave discussed in Note J.
F-57
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note B
Property and Equipment
Property and equipment consist of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Computer equipment
|
|
$
|
2,309,323
|
|
|
$
|
2,318,941
|
|
|
$
|
2,004,213
|
|
Software
|
|
|
759,087
|
|
|
|
763,573
|
|
|
|
674,427
|
|
Furniture and fixtures
|
|
|
308,496
|
|
|
|
300,356
|
|
|
|
265,542
|
|
Leasehold improvements
|
|
|
45,300
|
|
|
|
45,610
|
|
|
|
116,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,422,206
|
|
|
|
3,428,480
|
|
|
|
3,060,233
|
|
Accumulated depreciation and amortization
|
|
|
3,062,366
|
|
|
|
3,036,330
|
|
|
|
2,534,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
359,840
|
|
|
$
|
392,150
|
|
|
$
|
525,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense of property and equipment
was approximately $43,000, $303,000 and $273,000 for the period
from January 1, 2010 through February 28, 2010, and
the years ended December 31, 2009 and December 31,
2008, respectively.
Note C
Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Orix Venture Finance loan
|
|
$
|
5,333,333
|
|
|
$
|
6,000,000
|
|
|
$
|
6,000,000
|
|
Less related unamortized discount
|
|
|
|
|
|
|
(77,654
|
)
|
|
|
(223,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
|
5,333,333
|
|
|
|
5,922,346
|
|
|
|
5,776,745
|
|
Less current maturities
|
|
|
(5,333,333
|
)
|
|
|
(5,922,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net long term debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,776,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of Credit Facility
Prior to January 1, 2007 the Company held a
$1.5 million credit facility with a bank to provide working
capital financing. The credit facility matured on
February 28, 2007, and was not subsequently renewed at the
option of Company management. As a condition of entering into
the credit facility, the Company issued to the bank a warrant to
purchase 50,000 shares of the Companys common stock
with an initial exercise price of $0.30 per share. On
February 28, 2010 these warrants were redeemed by the
Company at the aggregate exercise price of $15,000.
Horizon
Technology Loan
On November 3, 2005, the Company entered into a loan and
security agreement with Horizon Technology Funding Company for
$3.5 million. The loan was repaid in full on June 14,
2007 using proceeds from the Orix Venture Finance loan described
below.
Concurrent with execution of the Horizon loan agreement,
warrants were issued to the lender to purchase
199,692 shares of Series F Convertible Preferred Stock
at a price of $1.75 per share under certain terms and
conditions. The warrants were exercisable from the date of grant
through the later of seven years from the grant date, or four
years after the closing of the Companys initial public
offering. The Company recorded the fair value of the warrant of
$263,314 as a discount to the face amount of the debt and a
credit to additional paid-in capital, and
F-58
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amortized this over the intended life of the loan. The discount
was fully amortized prior to 2008. The warrants were canceled in
conjunction with the sale of the business effective
March 1, 2010 as discussed in Note J.
The holders of the warrants were also entitled to receive, upon
exercise of the warrant, a proportionate share of any such
Series F dividend as though it were the holder of the
preferred stock, from the date the warrants were issued.
Accumulated dividends payable to the warrant holders have been
included within the carrying value of the Series F
Convertible Preferred Stock.
Orix
Venture Finance Loan
On June 14, 2007, the Company entered into a loan and
security agreement with Orix Venture Finance LLC and obtained a
$5 million term loan and $1.5 million revolving loan.
Prior to the amendment described below, the term loan required
interest only payments on amounts outstanding at a rate of prime
plus 3.0 percent from June 18, 2007 through
December 18, 2008 and also required 30 equal monthly
payments to commence January 18, 2009, of principal plus
accrued interest on the outstanding principal.
The revolving loan provided for borrowings up to the lesser of
$1.5 million or 80 percent of eligible accounts
receivable. The revolving loan was terminated on
November 13, 2008 as part of the amendment of the loan and
security agreement described below. Prior to termination, it
required monthly payments of interest on outstanding principal
equal to prime plus 1.0 percent per annum and matured on
June 14, 2009.
On November 13, 2008, the Company entered into an amendment
of the loan and security agreement with Orix Venture Finance
LLC, increasing the principal balance on the term loan to
$6 million. Interest on the principal balance of the term
loan was due monthly at a rate of the base rate, plus
3.5 percent. The base rate is defined as the higher of the
prime rate or the LIBOR rate plus 2.5 percent, or
4 percent. Principal repayment commenced in January 2010
and was due in eight equal monthly payments of $333,333, with
the remaining principle balance of the term loan being payable
on the maturity date, which was extended through
September 12, 2010. For the period from January 1,
2010 through February 28, 2010 and the years ended
December 31, 2009 and 2008 the interest rate on the
facility was 9.5%. As described in Note J, the Orix Venture
Finance Loan outstanding balance was paid in full on
March 1, 2010 in conjunction with the Companys
transaction with Trustwave.
The borrowings of the term loan were secured by substantially
all the Companys assets, and subject the Company to
certain financial and restrictive covenants. The Company is in
compliance with all covenants for the period from
January 1, 2010 through February 28, 2010 and for the
years ended December 31, 2009 and 2008.
The Company incurred interest expense on this loan of
approximately $89,000, $578,000 and $466,000 for the period from
January 1, 2010 through February 28, 2010 and the
years ended December 31, 2009 and December 31, 2008,
respectively.
Upon execution of the original loan and security agreement,
warrants were issued to the lender to purchase
285,274 shares of Series F Convertible Preferred Stock
at a price of $1.7527 per share under certain terms and
conditions. The warrants are exercisable from the date of grant
through the later of seven years after the date of grant, or
four years after the closing of the Companys initial
public offering.
Additionally, with the execution of the amendment, warrants were
issued to the lender to purchase 42,791 shares of
Series G Convertible Preferred Stock at a price $1.7527 per
share under certain terms and conditions. The warrants were
exercisable from the date of the grant through the later of
seven years after the date of the grant. As discussed in
Note J, these warrants were exchanged for warrants to
purchase common stock of Trustware.
The estimated fair value of the warrants issued above was
determined using a Black-Scholes option pricing model. This
resulted in an estimated fair value Series F warrants of
$379,956 and an estimated fair value of the Series G
warrants of $55,526. Such amounts were recorded as a discount to
the face amount of the debt, and amortization of such discount
was recognized over the term of the debt.
F-59
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note D
Income Taxes
No provision for income taxes has been recorded for the period
from January 1, 2010 through February 28, 2010 and the
years ended December 31, 2009 and December 31, 2008,
as a result of the operating losses incurred by the Company. The
income tax benefit of the operating losses has been offset by
increases in the valuation allowance.
Components of the Companys net deferred income taxes are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
8,138,883
|
|
|
$
|
7,615,354
|
|
|
$
|
6,735,165
|
|
Tax credits
|
|
|
2,434,742
|
|
|
|
2,452,574
|
|
|
|
2,121,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,573,625
|
|
|
|
10,067,928
|
|
|
|
8,856,857
|
|
Valuation allowance
|
|
|
(10,573,625
|
)
|
|
|
(10,067,928
|
)
|
|
|
(8,856,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 28, 2010, December 31, 2009 and
December 31, 2008, the Company has recorded a full
valuation allowance against its net deferred tax asset due to
the uncertainty surrounding the realizability of such asset. The
Company has net operating losses (NOL) carryforwards in Canada.
The NOL carryforwards in Canada will expire between 2010 and
2011. The Company has NOL carryforwards in the U.S. of
approximately $12.2 million, $10.9 million and
$9.2 million, as of February 28, 2010,
December 31, 2009 and December 31, 2008 respectively.
The NOL carryforwards in the U.S. expire at various periods
through 2025.
Due to changes in the Companys ownership over time, it is
possible that future utilization of the net operating loss
carryforwards may be subject to certain limitations imposed
under Internal Revenue Code Section 382. While the scope of
any such limitations has not been determined, they could result
in significant permanent impairments to be the Companys
net operating loss carryforwards and reduction in the gross
deferred tax asset that is disclosed above.
The Canadian investment tax credits of $2.4 million (USD)
will expire between 2010 and 2017.
Note E
Capital Structure
On November 10, 2008, the Company amended and restated its
Certificate of Incorporation and authorized
25,000,000 shares of common stock, $0.001 par value
per share and 14,543,792 shares of preferred stock,
$0.001 par value, of which 2,157,632 were designated as
Series B Preferred Stock, 326,709 were designated as
Series C Preferred Stock, 6,200,331 were designated as
Series D Preferred Stock, 2,478,648 were designated as
Series E Preferred Stock, 2,481,859 were designated as
Series F Preferred Stock, and 898,614 were designated as
Series G Preferred Stock. Upon amending and restating the
Certificate of Incorporation, the Company issued
855,823 shares of $0.001 par value Series G
Convertible Preferred Stock for cash consideration totaling
$1,429,874 (or 1.7527 per share), net of issuance costs totaling
$70,126. The holders of Series G Preferred Stock have a
priority liquidation preference over all other classes of
preferred stock, and the same redemption rights as holders of
Series B, D, E, and F Preferred Stock.
The following are the rights and preferences of the series of
preferred stock. Each Series of Preferred Stock entitled the
shareholder to a ratable distribution of assets upon sale or
liquidation of the Company. Refer to Note J which discusses
the terms of Trustwaves acquisition of the Company.
F-60
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Series B
Preferred Stock
Series B Preferred Stock gave the holder certain rights,
including the right to elect two of the five directors of the
Company and (together with the holders of the Series D,
Series E, Series F and Series G Preferred Stock)
certain voting rights. The shares are convertible, at the option
of the holder, into a specified number of shares of common stock
as determined by dividing the original issue price of $2.8254
per share by the applicable adjusted conversion price in effect
at the time of the conversion. The shares were to be converted
automatically into shares of common stock immediately prior to
the closing of an initial public offering. The holders also had
the right to a one-time dividend on each share of Series B
Preferred Stock held equal to $0.5506 per share (the
Series B Accrued Dividend) plus dividends on each share of
Series B Preferred Stock held at the per annum rate of
$0.28254 per share (the Series B Accruing Dividends). For
the Series B, Series D, Series E and
Series F Preferred Stock, the privileges and rights ranked
equally in right as to dividends, but junior to the
Series G Preferred Stock dividend rights. Accumulated
dividends totaled $5,403,538, $5,304,997 and $4,695,380 at
February 28, 2010, December 31, 2009 and
December 31, 2008, respectively.
The holders of Series B Preferred Stock together with the
holders of Series D, Series E and Series F were
entitled equally to receive a distribution in cash or property
out of the assets of the Company upon liquidation, dissolution
or wind up of the Company after the Series G holders
receive their full liquidation preference. The liquidation
preference to which holders of Series B Preferred Stock are
entitled shall be equal to $2.8254 per share plus the sum of all
unpaid Series B Accrued Dividends (whether or not
declared), unpaid Series B Accruing Dividends (whether or
not declared), and any other dividends declared but unpaid. In
the event the Companys assets are not sufficient to pay
the full amount per share to which holders of Series B,
Series D, Series E and Series F Preferred Stock
are entitled, then the holders of these series of Preferred
Stock shall share ratably in any such distribution of assets in
proportion to the fully liquidating distributions to which they
otherwise would be entitled. The shares participate with common
stock on all amounts remaining after the payment of all
liquidation preferences.
As amended, the shares were redeemable in cash on or after
October 31, 2012, at the option of the holders of
two-thirds of the Series B, Series D, Series E,
Series F and Series G Preferred Stock voting as a
single class. The redemption price for each share of preferred
stock shall be the greater of the applicable liquidation
preference through the date of payment or the book value of a
share of preferred stock as determined by the Board of
Directors. In the event sufficient funds were not available on
the redemption closing date, holders of Series B,
Series D, Series E, Series F and Series G
Preferred Stock were to share ratably in any funds legally
available for redemption of such shares.
Series C
Preferred Stock
Series C Preferred Stock gave the holder certain rights
subordinate to Series B, D, E, F and G Preferred Stock.
Series C Preferred Stock was convertible, at the option of
the holder, into a specified number of shares of common stock as
determined by dividing the original issue price of $2.8254 per
share by the applicable adjusted conversion price in effect at
the time of the conversion. Shares of Series C Preferred
Stock were to be converted automatically into shares of common
stock immediately prior to the closing of an initial public
offering. The holders of Series C Preferred Stock were
entitled, after all required distributions are made to the
holders of Series B, D, E, Series F and G Preferred
Stock but before any distribution to holders of common stock, to
a distribution in cash or property at its estimated fair value
as determined by the Board of Directors in an amount per share
equal to the distribution preference. The liquidation preference
to which holders of Series C Preferred Stock were entitled
was equal to $2.8254 per share. The Series C shares did not
participate with common stock after payment of their liquidation
preference.
As amended, Series C Preferred Stock was redeemable in cash
on or after October 31, 2012, at the option of the holders
of two-thirds of the Series B, Series D,
Series E, Series F and Series G Preferred Stock
voting as a single class. The redemption price for each share of
preferred stock was the greater of the applicable liquidation
preference
F-61
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
through the date of payment or the book value of a share of
Preferred Stock as determined by the Board of Directors. In the
event sufficient funds were not available on the redemption
closing date, holders of Series C were to share ratably in
any funds legally available for redemption only after all shares
of Series B, D, E, Series F and Series G
Preferred Stock had been redeemed.
Series D
Preferred Stock
Series D Preferred Stock gave the holder certain rights,
including the right to elect one of five directors of the
Company and (together with the holders of Series B,
Series E, Series F and Series G Preferred Stock)
certain voting rights. Series D Preferred Stock gave the
holder certain rights, which were the same as the holders of
Series B,C, E, F and G Preferred Stock have as related to
liquidation preferences and redemption rights. The Series D
Preferred Stock, however, was convertible, at the option of the
holder, into a specified number of shares of common stock as
determined by dividing the original issue price of $1.0764 per
share by the applicable adjusted conversion price in effect at
the time of the conversion. Shares of Series D Preferred
Stock were to be converted automatically into shares of common
stock immediately prior to the closing of an initial public
offering or upon the vote or consent of at least 80 percent
of the holders of Series D Preferred Stock. Dividends
accrued at the per annum rate of $0.10764 per share. The
Series B, Series D, Series E and Series F
Preferred Stock ranked equally in right as to dividends, but
junior to the Series G Preferred Stock dividend rights.
Accumulated dividends totaled $4,615,142, $4,507,260 and
$3,839,856 at February 28, 2010, December 31, 2009 and
December 31, 2008, respectively.
The holders of Series D Preferred Stock together with the
holders of Series B, Series E and Series F were
entitled equally to receive a distribution in cash or property
out of the assets of the Company upon liquidation, dissolution
or wind up of the Company after the Series G holders
receive their full liquidation preference. The liquidation
preference to which holders of Series D Preferred Stock were
entitled was equal to $1.0764 per share plus the sum of all
unpaid Series D Accrued Dividends (whether or not declared),
unpaid Series D Accruing Dividends (whether or not
declared), and any other dividends declared but unpaid. In the
event the Companys assets were not sufficient to pay the
full amount per share to which holders of Series B,
Series D, Series E and Series F Preferred Stock
were entitled, then the holders of these series of Preferred
Stock would have shared ratably in any such distribution of
assets in proportion to the fully liquidating distributions to
which they otherwise would have been entitled. The shares
participated with common stock on all amounts remaining after
the payment of all liquidation preferences.
Series E
Preferred Stock
Series E Preferred Stock gave the holder certain rights,
including the right to elect one of five directors of the
Company and (together with the holders of Series B,
Series D, Series F and Series G Preferred Stock)
certain voting rights. Series E Preferred Stock gave the
holder certain rights, which were the same as the holders of
Series B as related to liquidation preferences and
redemption rights. The holders of Series E also had certain
voting rights and the right to elect one of the four directors
of the Company. The shares were convertible, at the option of
the holder, into a specified number of shares of common stock as
determined by dividing the original issue price of $1.6138 per
share by the applicable adjusted conversion price in effect at
the time of the conversion. The shares would have converted
automatically into shares of common stock immediately prior to
the closing of an initial public offering. Dividends accrued at
the per annum rate of $0.1291 per share. The Series B,
Series D, Series E and Series F Preferred Stock ranked
equally in right as to dividends, but junior to the
Series G Preferred Stock dividend rights. Accumulated
dividends totaled $1,806,867, $1,755,142 and $1,435,149 at
February 28, 2010, December 31, 2009 and
December 31, 2008, respectively.
The holders of Series E Preferred Stock together with the
holders of Series B, Series D and Series F were
entitled equally to receive a distribution in cash or property
out of the assets of the Company upon liquidation, dissolution
or wind up of the Company after the Series G holders
received their full liquidation preference. The liquidation
preference to which holders of Series E Preferred Stock
were entitled was equal to $2.2190 per share
F-62
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
plus the sum of all unpaid Series E Accrued Dividends
(whether or not declared), unpaid Series E Accruing
Dividends (whether or not declared), and any other dividends
declared but unpaid. In the event the Companys assets were
not sufficient to pay the full amount per share to which holders
of Series B, Series D, Series E and Series F
Preferred Stock were entitled, then the holders of these series
of Preferred Stock would have shared ratably in any such
distribution of assets in proportion to the fully liquidating
distributions to which they otherwise would be entitled. The
shares participated with common stock on all amounts remaining
after the payment of all liquidation preferences.
Series F
Preferred Stock
Series F Preferred Stock gave the holder certain rights,
including (together with the holders of Series B,
Series D, Series E and Series G Preferred Stock)
certain voting rights. Series F Preferred Stock gave the
holder certain rights, which were the same as the holders of
Series B, D, and E Preferred Stock had related to
liquidation preferences and redemption rights. The Series F
Preferred Stock, however, was convertible, at the option of the
holder, into a specified number of shares of common stock as
determined by dividing the original issue price of $1.7527 per
share by the applicable adjusted conversion price in effect at
the time of the conversion. Shares of Series F Preferred
Stock would have converted automatically into shares of common
stock immediately prior to the closing of an initial public
offering or upon the vote or consent of at least two-thirds of
the holders of Series F Preferred Stock. Dividends accrued
at the per annum rate of $0.14022 per share. Series B,
Series D, Series E and Series F Preferred Stock
shall rank equally in right as to dividends, but junior to the
Series G Preferred Stock dividend rights. Accumulated
dividends on Series F totaled $1,363,622, $1,313,837 and
$1,005,840 at February 28, 2010, December 31, 2009 and
December 31, 2008, respectively.
The holders of Series F Preferred Stock together with the
holders of Series B, Series D and Series E were
entitled equally to receive a distribution in cash or property
out of the assets of the Company upon liquidation, dissolution
or wind up of the Company after the Series G holders
received their full liquidation preference. The liquidation
preference to which holders of Series F Preferred Stock
were entitled was equal to $1.7527 per share plus the sum of all
unpaid Series F Accrued Dividends (whether or not
declared), unpaid Series F Accruing Dividends (whether or
not declared), and any other dividends declared but unpaid. In
the event the Companys assets were not sufficient to pay
the full amount per share to which holders of Series B,
Series D, Series E and Series F Preferred Stock
were entitled, then the holders of these series of Preferred
Stock would have shared ratably in any such distribution of
assets in proportion to the fully liquidating distributions to
which they otherwise would be entitled. The shares participated
with common stock on all amounts remaining after the payment of
all liquidation preferences.
Series G
Preferred Stock
Series G Preferred Stock gave the holder certain rights,
including (together with the holders of Series B,
Series D, Series E and Series F Preferred Stock)
certain voting rights. Series G Preferred Stock was
convertible, at the option of the holder, into a specified
number of shares of common stock as determined by dividing the
original issue price of $1.7527 per share by the applicable
adjusted conversion price in effect at the time of conversion.
The shares would have converted automatically into shares of
common stock immediately prior to the closing of an initial
public offering or upon the vote or consent of at least
two-thirds of the holders of Series G Preferred Stock.
Dividends accrued at the per annum rate of $0.14022 per share.
The Series G Preferred Stock ranked senior to the Common
Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock and any other junior
class of capital stock of the Corporation in right as to
dividends , and any dividends were to be paid to the holders of
Series G Preferred Stock prior and in preference thereto.
Accumulated dividends on Series G totaled $155,177,
$135,781 and $15,781 at February 28, 2010,
December 31, 2009 and December 31, 2008, respectively.
F-63
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The holders of Series G Preferred Stock ranked senior in
liquidation preference to all other classes of Preferred Stock
in the event of a distribution in cash or property out of the
assets of the Company upon liquidation, dissolution or wind up
of the Company. The liquidation preference to which holders of
Series G Preferred Stock were entitled was equal to $1.7527
per share plus the sum of all unpaid Series G Accrued
Dividends (whether or not declared), unpaid Series G
Accruing Dividends (whether or not declared), and any other
dividends declared but unpaid. The Series G Preferred Stock
participated with common stock on all amounts remaining after
the payment of all liquidation preferences.
Note F
Employee Benefit Plan
The Company offered a 401(k) benefit plan to all employees.
Employees were eligible to enroll immediately upon employment
with the Company. Vesting began at date of hire. Eligible
employees could elect to contribute 1 percent to
15 percent of their compensation on a pre-tax basis to the
plan. The Company did not match or contribute any amounts to the
plan.
Note G
Incentive Stock Option Plan
In June 2003, the Company implemented a stock option and
incentive plan to provide stock options and other equity
interest to employees, officers, directors and contractors.
Pursuant to the plan, the Companys Board of Directors was
authorized to grant awards to acquire up to
3,901,303 shares within 10 years of adoption of the
plan. The exercise price of each stock option granted under the
plan and the conditions and limitations applicable to the
exercise of each option were determined at the sole discretion
of the Board of Directors. The options had a term of up to
10 years when issued and vested over varying terms as
determined by the Board of Directors.
The Company accounted for share-based payment arrangements using
estimated fair value. As such, the fair value of each option
award is estimated on the date of grant using the Black-Scholes
model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
December 31,
|
|
December 31,
|
Period Ended
|
|
2010
|
|
2009
|
|
2008
|
|
Volatility
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
70
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
F-64
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides a summary of activity in the
Incentive Stock Option plan for the periods ended
February 28, 2010, December 31, 2009 and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at January 1, 2008
|
|
|
2,488,911
|
|
|
$
|
0.18
|
|
Granted
|
|
|
33,500
|
|
|
|
0.09
|
|
Exercised
|
|
|
(3,291
|
)
|
|
|
0.11
|
|
Forfeited
|
|
|
(33,909
|
)
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
2,485,211
|
|
|
|
0.26
|
|
Granted
|
|
|
15,500
|
|
|
|
0.09
|
|
Exercised
|
|
|
(1,000
|
)
|
|
|
0.09
|
|
Forfeited
|
|
|
(123,409
|
)
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
2,376,302
|
|
|
|
0.25
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(156,738
|
)
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2010
|
|
|
2,219,564
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of change in unvested
options outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
|
Shares
|
|
Price
|
|
Unvested, January 1, 2008
|
|
|
1,038,508
|
|
|
$
|
0.43
|
|
Granted
|
|
|
33,500
|
|
|
|
0.09
|
|
Vested
|
|
|
(511,184
|
)
|
|
|
0.21
|
|
Forfeited
|
|
|
(20,264
|
)
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2008
|
|
|
540,560
|
|
|
|
0.43
|
|
Granted
|
|
|
15,500
|
|
|
|
0.09
|
|
Vested
|
|
|
(242,791
|
)
|
|
|
0.42
|
|
Forfeited
|
|
|
(71,633
|
)
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2009
|
|
|
241,636
|
|
|
|
0.42
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(45,973
|
)
|
|
|
0.42
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at February 28, 2010
|
|
|
195,663
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
F-65
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recognized share-based compensation expense of
$6,395, $7,514 and $7,556 for the period from January 1,
2010 through February 28, 2010 and the years ended
December 31, 2009 and December 31, 2008, respectively,
relating to the grants of stock options.
The weighted-average grant-date fair value of options granted
during the years ended December 31, 2009 and 2008 was
$0.06. There were no grants made during the period from
January 1, 2010 through February 28, 2010. As of
February 28, 2010, there was no unrecognized compensation
cost related to stock options.
At February 28, 2010, December 31, 2009 and
December 31, 2008, options to purchase 2,023,901, 2,134,666
and 1,944,651 shares, respectively, of common stock were
exercisable at a weighted-average exercise price of $0.23, $0.23
and $0.21 per share, respectively. The weighted-average
remaining contractual life of options outstanding at
February 28, 2010, December 31, 2009 and
December 31, 2008 was 4.98, 5.14 and 6.06, respectively.
As of February 28, 2010, 399,578 shares were available
for awards under the Incentive Stock Plan.
As described in Note J all of the outstanding stock options
to purchase common shares of the Company were effectively
cancelled on March 1, 2010, the effective date of the
acquisition by Trustwave.
Note H
Supplemental Cash Flow Information
Supplemental
Disclosure of Cash Flow Information
The Company paid the following amounts for interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
December 31,
|
|
December 31,
|
Period Ended
|
|
2010
|
|
2009
|
|
2008
|
|
Interest
|
|
$
|
95,528
|
|
|
$
|
580,437
|
|
|
$
|
468,104
|
|
Note I
Commitments and Contingencies
Office
Space Leases
The Company has non-cancelable operating leases for facilities
requiring minimum lease payments through 2015. Certain of these
leases are subject to fixed escalations over the life of the
lease. Minimum rental expense relating to such leases is
recognized on a straight-line basis over the term of the lease.
Rent expense was approximately $67,000, $395,000 and $378,000
for the period from January 1, 2010 through
February 28, 2010, and the years ended December 31,
2009 and December 31, 2008, respectively.
As of February 28, 2010, the future minimum operating lease
payments are as follows:
|
|
|
|
|
March 1, 2010, through December 31, 2010
|
|
$
|
341,000
|
|
2011
|
|
|
403,000
|
|
2012
|
|
|
412,000
|
|
2013
|
|
|
360,000
|
|
2014
|
|
|
181,000
|
|
Thereafter
|
|
|
60,000
|
|
|
|
|
|
|
|
|
$
|
1,757,000
|
|
|
|
|
|
|
Capital
Leases
The Company maintains computers under long-term leases that
qualified as capital leases for financial reporting purposes.
Accordingly, the present value of the future minimum lease
payments has been capitalized. The leases expire in 2012. The
leased property had a total cost basis of $465,500, at
February 28, 2010, December 31,
F-66
INTELLITACTICS,
INC., AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009 and December 31, 2008, respectively. Accumulated
amortization of leased equipment at February 28, 2010,
December 31, 2009 and December 31, 2008 was $445,974,
$444,322 and $434,407, respectively. Amortization expense
relating to such capital leases was $1,652, $9,915 and $7,436
the period from January 1, 2010 through ended
February 28, 2010, and the years ended December 31,
2009 and December 31, 2008, respectively.
The following is a schedule of approximate future minimum lease
payments under the Companys capital leases as of
February 28, 2010:
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
23,017
|
|
Less: amount representing interest
|
|
|
(2,011
|
)
|
|
|
|
|
|
Present value of future minimum lease payments
|
|
|
21,006
|
|
Less: current maturities of obligations under capital leases
|
|
|
(9,597
|
)
|
|
|
|
|
|
Obligations under capital leases, net of current portion
|
|
$
|
11,409
|
|
|
|
|
|
|
Litigation
and Claims
Various lawsuits, claims and contingent liabilities arise in the
ordinary course of the Companys business. The ultimate
disposition of certain of these contingencies is not
determinable at this time. The Companys management
believes there are no current outstanding matters that will
materially affect the Companys financial position or
results of operations.
Note J
Subsequent Events
On March 1, 2010, the Company was acquired by Trustwave
through execution of a merger agreement. As part of this
agreement, the Orix Venture Finance Loan (discussed in
Note C) was repaid in full and all Common stock and
Series C Preferred Stock (discussed in
Note E) were cancelled. The remaining Series B,
D, E, F and G Preferred Stock were all converted to common stock
in the acquirer (Trustwave). All options to purchase common
stock of Intellitactics, Inc. were cancelled at this date,
together with all outstanding warrants other than the warrants
issued to Orix Venture Finance, which were converted to warrants
to receive common stock of Trustwave.
The Company evaluated its financial statements for subsequent
events through December 3, 2010, the date of the financial
statements were available to be issued. The Company is not aware
of any subsequent events which would require recognition or
disclosure in the financial statements except those transactions
discussed above.
F-67
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,048,839
|
|
|
$
|
982,578
|
|
Trade accounts receivable net
|
|
|
1,331,605
|
|
|
|
973,265
|
|
Inventories net
|
|
|
79,311
|
|
|
|
132,316
|
|
Prepaid expenses and other current assets
|
|
|
567,744
|
|
|
|
569,674
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,027,499
|
|
|
|
2,657,833
|
|
Fixed Assets Net
|
|
|
331,831
|
|
|
|
382,984
|
|
Capitalized Software Net
|
|
|
309,256
|
|
|
|
364,577
|
|
Deposits
|
|
|
26,552
|
|
|
|
26,552
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,695,138
|
|
|
$
|
3,431,946
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Current portion of note payable
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Note payables related parties
|
|
|
9,099,934
|
|
|
|
7,299,934
|
|
Accounts payable
|
|
|
345,926
|
|
|
|
279,069
|
|
Accrued expenses and other current liabilities
|
|
|
2,195,644
|
|
|
|
1,951,205
|
|
Deferred revenue
|
|
|
1,624,960
|
|
|
|
1,456,117
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
15,266,464
|
|
|
|
12,986,325
|
|
Note payable, less current portion
|
|
|
1,416,667
|
|
|
|
1,666,667
|
|
Other liabilities
|
|
|
89,176
|
|
|
|
80,476
|
|
Deferred revenue
|
|
|
218,518
|
|
|
|
120,444
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
16,990,825
|
|
|
|
14,853,912
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
Redeemable Convertible Preferred stock, $0.001 par value;
48,272,927 shares authorized:
|
|
|
|
|
|
|
|
|
Series B 38,558,333 shares designated;
38,125,000 shares issued and outstanding at both
March 31, 2010 and December 31, 2009 (liquidating
preference $22,875,000)
|
|
|
38,125
|
|
|
|
38,125
|
|
Series A 9,714,594 shares designated;
9,687,094 shares issued and outstanding at both
March 31, 2010 and December 31, 2009 (liquidating
preference $9,687,094)
|
|
|
9,688
|
|
|
|
9,688
|
|
Common stock, $0.001 par value; 66,450,000 shares
authorized; 2,717,467 and 3,329,906 shares issued and
outstanding at March 31, 2010 and December 31, 2009,
respectively
|
|
|
2,717
|
|
|
|
2,717
|
|
Additional paid-in capital
|
|
|
34,996,718
|
|
|
|
34,985,716
|
|
Accumulated deficit
|
|
|
(48,342,935
|
)
|
|
|
(46,458,212
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(13,295,687
|
)
|
|
|
(11,421,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,695,138
|
|
|
$
|
3,431,946
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-68
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenues
|
|
$
|
1,300,969
|
|
|
$
|
1,387,112
|
|
Cost of revenues
|
|
|
420,824
|
|
|
|
393,403
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
880,145
|
|
|
|
993,709
|
|
Sales and marketing expenses
|
|
|
1,181,652
|
|
|
|
1,568,197
|
|
Research and development expenses
|
|
|
734,560
|
|
|
|
697,131
|
|
General and administrative expenses
|
|
|
620,236
|
|
|
|
906,898
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(1,656,303
|
)
|
|
|
(2,178,517
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(222,732
|
)
|
|
|
(128,590
|
)
|
Other income
|
|
|
4,500
|
|
|
|
13,270
|
|
Other expense
|
|
|
(2,488
|
)
|
|
|
|
|
Interest income
|
|
|
40
|
|
|
|
2,610
|
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
(220,680
|
)
|
|
|
(112,710
|
)
|
|
|
|
|
|
|
|
|
|
Loss Before Income Taxes
|
|
|
(1,876,983
|
)
|
|
|
(2,291,227
|
)
|
Income tax provision
|
|
|
7,740
|
|
|
|
261,495
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,884,723
|
)
|
|
$
|
(2,552,722
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-69
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,884,723
|
)
|
|
$
|
(2,552,722
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
107,066
|
|
|
|
116,444
|
|
Provision for (recovery of) bad debts
|
|
|
(30,403
|
)
|
|
|
22,533
|
|
Excess and obsolete inventory reserve
|
|
|
27,968
|
|
|
|
20,211
|
|
Stock-based compensation
|
|
|
11,002
|
|
|
|
21,281
|
|
Amortization of debt discount
|
|
|
4,822
|
|
|
|
4,822
|
|
Increase (decrease) in cash resulting from changes in:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(327,937
|
)
|
|
|
(208,272
|
)
|
Inventories
|
|
|
25,037
|
|
|
|
(133,898
|
)
|
Prepaid expenses and other current assets
|
|
|
(2,892
|
)
|
|
|
45,881
|
|
Deposits
|
|
|
|
|
|
|
16,800
|
|
Accounts payable
|
|
|
66,857
|
|
|
|
39,972
|
|
Accrued expenses and other current liabilities
|
|
|
244,439
|
|
|
|
333,410
|
|
Deferred revenue
|
|
|
266,917
|
|
|
|
142,127
|
|
Other liabilities
|
|
|
8,700
|
|
|
|
(14,896
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,483,147
|
)
|
|
|
(2,146,307
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(592
|
)
|
|
|
(28,091
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable
|
|
|
1,800,000
|
|
|
|
299,934
|
|
Principal payments on notes payable
|
|
|
(250,000
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
1,484
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,550,000
|
|
|
|
301,418
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
66,261
|
|
|
|
(1,872,980
|
)
|
Cash and Cash Equivalents at Beginning of Period
|
|
|
982,578
|
|
|
|
3,717,537
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
1,048,839
|
|
|
$
|
1,844,557
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid during the quarter for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
55,698
|
|
|
$
|
59,053
|
|
Income taxes
|
|
$
|
2,856
|
|
|
$
|
800
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-70
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
1.
|
Summary
of Significant Accounting Policies
|
A summary of the Companys significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements follows.
Nature
of Operations
Breach Security, Inc. (the Company), a
Delaware corporation, was incorporated in May 2004. The Company
is organized to develop web application firewalls that protect
against online attacks bypassed by traditional network security
solutions. The Company also provides security assessment
services as well as training and support for its products.
The Company has two wholly-owned subsidiaries, Breach Security,
Ltd. in Herzliya, Israel and Breach Security (UK) Limited, in
the United Kingdom. The Companys principal market is the
United States and Europe with potential to expand into other
areas of the world.
In June 2010, the Company was acquired by TrustWave Holdings,
Inc. (see Note 8).
Principles
of Consolidation
The financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Basis
of Presentation
The accompanying unaudited consolidated financial statements of
the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP) for interim financial information and with
the instructions to
Form 10-Q
and
Article 8-03
of
Regulation S-X.
Accordingly, these consolidated financial statements do not
include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management,
the unaudited consolidated financial statements contain all
adjustments, consisting of normal recurring items, considered
necessary for a fair presentation of the Companys
financial position, results of operations and cash flows.
Operating results for the three months ended March 31, 2010
are not necessarily indicative of the results of operations for
the year ending December 31, 2010.
The consolidated balance sheet at December 31, 2009, has
been derived from the audited consolidated financial statements
as of that date but does not include all of the information and
footnotes included in the Companys audited financial
statements for the year ended December 31, 2009. For
further information, refer to the consolidated financial
statements and footnotes thereto.
Use of
Estimates
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Significant estimates used in preparing the consolidated
financial statements include those assumed in computing the
allowance for uncollectible accounts receivable, the reserve for
obsolete inventory, the valuation allowance on deferred tax
assets, testing intangible assets for impairment, certain
accrued liability account balances, and stock-based compensation
expense.
Liquidity
At March 31, 2010, the Company had an accumulated deficit
of approximately $48,343,000 and a net loss of approximately
$1,885,000. The Company also had negative cash flows from
operations of approximately $1,483,000 for the three months
ended March 31, 2010.
F-71
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company expects to cover its future anticipated operating
expense through cash on hand, billings to customers, and
additional financing from existing investors. However, while the
likelihood of a liquidity crisis is considered remote, should
one occur, there are no guarantees that the Company would obtain
sufficient cash from outside sources on a timely basis.
Management does not believe this situation represents a
significant risk to the Company.
Subsequent to March 31, 2010, the Company obtained
$14,865,000 in debt financing from its major investor (see
Note 8).
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
original maturities of 90 days or less to be cash
equivalents.
Accounts
Receivable
The Company has established an allowance for doubtful accounts
for potential credit losses that are expected to be incurred,
based on historical information and specific identification.
Trade receivables deemed uncollectible are written off against
the allowance.
The allowance for doubtful accounts at March 31, 2010 and
2009 was approximately $96,000 and $97,000, respectively.
Inventories
Inventories are stated at the lower of cost
(first-in,
first-out) or market, and consist primarily of finished goods.
At March 31, 2010 and 2009, the Company has provided a
reserve for obsolete inventory of approximately $336,000 and
$306,000, respectively.
Fixed
Assets and Depreciation
Property and equipment are carried at cost. Expenditures that
extend the life of the asset are capitalized and depreciated.
Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the
related assets or, in the case of leasehold improvements, over
the lesser of the useful life of the related asset or the lease
term. The estimated useful life of the fixed assets range
between three to fourteen years.
Impairment
of Long-Lived Assets
In accordance with authoritative guidance related to accounting
for the impairment or disposal of long-lived assets, management
reviews the Companys long-lived assets, including property
and equipment and capitalized software, for impairment whenever
events or changes in circumstances indicate that their carrying
amounts may not be recoverable. To determine recoverability of
its long-lived assets, the Company evaluates whether future
undiscounted net cash flows will be less than the carrying
amount of the assets and adjusts the carrying amount of its
assets to fair value. Management has determined that no
impairment of long-lived assets occurred during the three months
ended March 31, 2010 or 2009.
Foreign
Currency
The U.S. dollar is the functional currency of the
Companys foreign subsidiaries. Assets and liabilities are
translated at the current year end exchange rate, equity at the
historical rate, and income statement items at the weighted
average exchange rate for the period. Translation gains or
losses are included in the consolidated statements of
operations. For 2010 and 2009, such gains and losses were
insignificant.
F-72
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The Company accounts for stock options issued to employees in
accordance with the authoritative guidance on stock
compensation. Under this guidance, stock based compensation cost
is measured at the grant date, based on the calculated fair
value of the award. The cost is recognized as an expense, under
the straight-line method, over the employees requisite
service period, which is generally the vesting period of the
equity grant.
Income
Taxes
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year
end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the combination of the tax
payable for the year and the change during the year in deferred
tax assets and liabilities. The Companys foreign
subsidiaries are subject to foreign corporate income taxes.
Deferred U.S. income taxes are not accrued on undistributed
earnings of foreign subsidiaries because such earnings are
permanently reinvested.
Revenue
Recognition
Prior to 2009, the Company recognized revenue in accordance with
authoritative guidance related to the accounting for software.
Under this guidance, the Company used the residual
method to recognize revenue when evidence of the fair
value of all undelivered elements existed. Under the residual
method, the fair value of the undelivered elements (i.e.
maintenance) based on vendor specific objective evidence of fair
value (VSOE) was deferred and the remaining portion
of the arrangement fee was allocated to the delivered elements
(i.e. software license and hardware). The Company determined
VSOE of the fair value of the maintenance services based on
customer renewals. If the Company could not establish VSOE on
the undelivered elements, then all revenue was deferred and
recognized ratably over the maintenance and support agreements
which are typically twelve months.
Effective January 1, 2009, the Company early adopted new
accounting guidance that relates to certain revenue arrangements
that include hardware and software elements. Previously,
companies that sold tangible products with more than
incidental software were required to apply software
revenue recognition guidance. Under the new guidance, tangible
products that have software components that are essential
to the functionality of the tangible product are excluded
from the software revenue recognition guidance. Upon the
adoption of this guidance, the Companys software-enabled
products are now subject to the new guidance for multiple
deliverable arrangements. Under this guidance, because the
Company is unable to establish VSOE or third party evidence for
deliverables in an arrangement, it has applied its best estimate
of the selling price to separate deliverables and allocate
arrangement consideration using the relative selling price
method. In estimating the selling price, the Company considered
the cost to provide service, equipment cost, profit margin,
customer demand, the effect of competition on the product, and
other market constraints. After weighting the relevance of all
data, the Company estimated the stand alone selling price which
is included in its published price lists. The early adoption of
this guidance resulted in approximately $36,000 and $37,000 of
additional revenue recognized in 2010 and 2009, respectively,
that would have been deferred as of March 31, 2010 and 2009
had the Company elected not to early adopt the provisions of
this guidance.
Revenue is recognized when delivery has occurred, there is
persuasive evidence that an arrangement exists, the sales price
is fixed or determinable, and collection is probable. Revenue on
the hardware and embedded software is generally recognized upon
shipment of the unit. Revenue from maintenance and support
agreements is recognized ratably over the contractual period or
as services are performed.
F-73
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Research
and Development
The Company is actively engaged in new product development
efforts. Research and development expense relating to possible
future products are expensed as incurred.
Advertising
The Company expenses advertising costs as incurred. Advertising
expenses were approximately $30,000 and $70,000 through
March 31, 2010 and 2009, respectively.
New
Accounting Standards
In June 2008 the Financial Accounting Standards Board
(FASB) issued new authoritative guidance relating to
the accounting for derivatives and hedging. This guidance
provides direction when assessing whether an equity-linked
financial instrument (or embedded feature) is indexed to an
entitys own stock and the resulting classification of this
instrument as equity or a liability. The guidance provides that
an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instruments contingent exercise provisions and settlement
provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. The Company adopted
this guidance effective January 1, 2009, which did not have
a material impact on its consolidated financial statements.
In June 2009 the FASB issued new authoritative guidance that
establishes the FASB Accounting Standards Codification
(Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with GAAP. The FASB will no longer
issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead the
FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right
as they will only serve to update the Codification. The issuance
of this authoritative guidance and the Codification does not
change GAAP. This guidance became effective for the Company for
2009 and did not have a material impact on the Companys
consolidated financial statements.
The Company has a $1,000,000 line of credit with a bank which
matured on November 30, 2009, and was subsequently extended
to May 15, 2010. Interest is payable monthly at the prime
rate (3.25% at March 31, 2010) plus 4.5%. Advances on
the line are collateralized by substantially all of the
Companys assets. The outstanding balance on the line of
credit was $1,000,000 at March 31, 2010 and 2009. In June
2010 the Company repaid the outstanding balance on the line of
credit (see Note 8).
In August 2008 the Company entered into a loan and security
agreement with a bank for a $3,000,000 note payable. Interest is
payable in monthly installments at the prime rate (3.25% at
March 31, 2010) plus 2.5%, with the principal and all
unpaid interest due in August 2012. Advances on the note are
collateralized by substantially all of the Companys
assets. The outstanding balance on the note was $2,416,667 and
$3,000,000 at March 31, 2010 and 2009, respectively. In
June 2010 the Company repaid the balance of the note payable in
full (see Note 8).
The note payable and security agreement contains certain
non-financial covenants. Management is not aware of any
violations of these covenants at March 31, 2010.
The Company entered into various notes payable with related
parties during 2009 and 2010 (see Note 6).
F-74
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Breach Security, Inc. is authorized to issue
66,450,000 shares of common stock and
48,272,927 shares of preferred stock with a par value of
$0.001 per share.
Common
Stock
During the three months ended March 31, 2009, the Company
issued 14,842 shares of common stock upon exercise of stock
options at $0.10 per share.
Warrants
In October 2004 the Company issued warrants to purchase
20,000 shares of Series A preferred stock. The
warrants have an exercise price of $1.00 and expire in October
2011. None of the warrants have been exercised as of
March 31, 2010.
In February 2006 the Company issued warrants to purchase
7,500 shares of Series A preferred stock at an
exercise price of $1.00 per share. The warrants are exercisable
any time until February 2013. None of the warrants have been
exercised as of March 31, 2010.
In July 2007 the Company issued warrants to purchase
200,000 shares of Series B preferred stock at an
exercise price of $0.60 per share. The warrants are exercisable
any time until July 2014. None of the warrants have been
exercised as of March 31, 2010.
During August 2008 in connection with the line of credit and
note payable issued to a bank, the Company issued warrants to
purchase 200,000 shares of Series B preferred stock.
The exercise price of the warrants is $0.60 per share and the
warrants are exercisable any time until August 2018. None of the
warrants have been exercised as of March 31, 2010. During
2008 the Company recorded approximately $78,000 related to the
fair value of the warrants issued. The warrants were valued
using the Black-Scholes pricing model and the following
assumptions: contractual term of 10 years, an average risk
free interest rate of 3.91%, a dividend yield of 0%, and
volatility of 50%. This amount is presented as a discount to the
carrying value of the related debt, and is accreted as interest
expense over the life of the debt.
Subsequent to March 31, 2010, all outstanding warrants were
cancelled.
Stock
Options
During 2004 the Company adopted the 2004 USA and Israel Stock
Option Plan, as amended, (the Plan) which provides
for the granting of stock options, restricted stock, or stock
appreciation rights to employees, directors, and consultants.
The exercise price for options granted under the Plans may not
be less than their fair market value. The Plan terminates on the
earlier of ten years or the date on which all available options
are issued and fully vested. Options generally vest over four
years, with a 25% cliff vesting on the first anniversary of the
grant date, and then 1/48th monthly, and expire no later
than ten years from the date of grant. With respect to incentive
options, the exercise price for a stock option granted to
someone with greater than 10% of the total combined voting power
of all classes of stock of the Company shall not be less than
110% of the fair market value per share of common stock on the
option grant date. Additionally, with respect to incentive
options, the aggregate fair market value of the shares of common
stock for which options granted to any employee under the Plan
that may become exercisable during any one calendar year shall
not exceed $100,000. The Company has reserved
13,057,204 shares of common stock for issuance under the
Plan.
The Company uses the Black-Scholes valuation model to calculate
the fair value of stock options. No stock options were granted
during the three months ended March 31, 2010. The fair
value of stock options granted during
F-75
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the three months ended March 31, 2009 was measured at the
grant date using the weighted average assumptions in the table
below:
|
|
|
|
|
Expected volatility
|
|
|
38.9
|
%
|
Dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.1
|
%
|
Expected terms in years
|
|
|
6.0
|
|
Expected Volatility The expected volatility
is based on a peer group in the industry in which the Company
does business.
Dividend Yield The Company has not, and does
not, intend to pay dividends.
Risk-Free Interest Rate The Company applies
the risk-free interest rate based on the U.S. Treasury
yield in effect at the time of the grant.
Expected Term in Years The expected term is
based upon the Companys consideration of the historical
life of options, the vesting period of the option granted and
the contractual period of the option granted. The Company
calculated the expected term as the average of the contractual
term of the option and the vesting period, consistent with
authoritative guidance.
Weighted Average Fair Value of Options
Granted Using the weighted average assumptions
described above, the weighted average fair value of options
granted was $0.04 for 2009.
Forfeitures Stock-based compensation expense
recognized in the consolidated statements of operations is based
on awards ultimately expected to vest, reduced for estimated
forfeitures. The authoritative guidance related to the
accounting for stock compensation requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on historical
experience.
Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by employees who
receive equity awards, and subsequent events are not indicative
of the reasonableness of the original estimates of fair value
made by the Company under the authoritative guidance.
A summary of stock option activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Options outstanding at December 31, 2009
|
|
|
6,267,037
|
|
|
$
|
0.11
|
|
Cancelled/forfeited
|
|
|
(662,614
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2010
|
|
|
5,604,423
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, there were 4,135,412 stock options
outstanding and exercisable with a weighted average remaining
contractual life of 6.8 years and a weighted average
exercise price of $0.10 per share. The weighted average
remaining contractual life for all options outstanding at
March 31, 2010 was 7.1 years. The total fair value of
shares vested during the three months ended March 31, 2010
was approximately $15,000.
The aggregate intrinsic value of options outstanding and
exercisable at March 31, 2010 was approximately $27,000,
based on the difference between the exercise price and the value
of the Companys stock of $0.11 at March 31, 2010.
F-76
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the three months ended March 31, 2010 and 2009,
total stock-based compensation expense included in the
consolidated statements of operations of $11,002 and $21,281,
respectively, was charged as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Selling and marketing
|
|
$
|
4,790
|
|
|
$
|
8,993
|
|
General and administrative
|
|
|
2,714
|
|
|
|
7,930
|
|
Research and development
|
|
|
3,267
|
|
|
|
4,161
|
|
Cost of revenues
|
|
|
231
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
11,002
|
|
|
$
|
21,281
|
|
|
|
|
|
|
|
|
|
|
The Company has a 100% valuation allowance recorded against its
deferred tax assets; therefore, the stock-based compensation has
no tax effect on the consolidated statements of operations.
As of March 31, 2010, there was approximately $51,000 of
total unrecognized compensation expense related to unvested
share-based compensation arrangements granted under the Plan.
The cost is expected to be recognized over a weighted-average
period of 1.9 years.
Subsequent to March 31, 2010, all options under the Plan
were cancelled and the Company terminated the Plan.
Effective January 1, 2009, the Company adopted the
authoritative guidance related to uncertain tax positions. The
Company identified uncertain tax positions primarily associated
with penalties for late filing of certain information returns
related to its foreign subsidiaries for the years 2005, 2006,
and 2007, a potential assessment as a result of an audit of the
2004 and 2005 tax years by the State of Israel, and other
foreign income taxes related to the Companys operations.
The Company recorded a reserve of approximately $256,000 as a
result of the uncertainties surrounding these positions, which
is included in accrued expenses in the consolidated balance
sheets as of March 31, 2010 and 2009.
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense. As of March 31, 2009 and 2010, the
Company recognized approximately $50,000 and $0, respectively,
in interest and penalties associated with its unrecognized tax
benefits. The Company does not expect the total amount of
unrecognized tax benefits to significantly increase or decrease
within the next twelve months.
The Companys federal and state filings from inception to
date are all subject to examination.
|
|
6.
|
Related
Party Transactions
|
At various times prior to 2009 the Company issued promissory
notes payable to its major investors in the aggregate amount of
$5,400,000, with an annual interest rate of 8%. Notes totaling
$2,400,000 were converted into Series B preferred stock
prior to 2008. The remaining notes totaling $3,000,000 were
outstanding at March 31, 2010 and 2009. The maturity date
on the notes was initially March 31, 2009, and was
subsequently extended to May 31, 2010, subject to the
Company first satisfying its obligations under it notes payable
and line of credit to a financial institution.
At various times during 2009 the Company issued promissory notes
payable to its major investors in the aggregate amount of
approximately $4,300,000. The notes bear an annual interest rate
of 8% with a maturity date of
F-77
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
April 30, 2010, subject to the Company first satisfying its
obligations under its notes payable and line of credit to a
financial institution. Approximately $2,000,000 of these
promissory notes are convertible into Series B preferred
stock at a conversion rate of $0.45, or into shares of the
Companys equity securities sold in any subsequent equity
financing transaction at 75% of the price per share for such
shares. No amounts were converted during 2009 or 2010.
During the three months ended March 31, 2010, the Company
issued $1,800,000 in notes payable to its major investors, with
an annual interest rate of 8% and a maturity date of
May 31, 2010.
Subsequent to March 31, 2010 the Company issued $14,865,000
in notes payable to one of its investors (see Note 8).
|
|
7.
|
Commitments
and Contingencies
|
Accrued
Severance
Under Israeli law and in accordance with employment agreements,
the Companys Israeli subsidiary is required to make
severance payments to terminated employees. This liability is
computed for each employee based on the latest monthly salary
multiplied by the number of years of service. The Company is
obligated to pay the difference between the amount of the
liability computed and the amounts funded by Company insurance
policies. As of March 31, 2010 and 2009, the Company had
accrued severance of approximately $89,000 and $117,000,
respectively, which is included in other liabilities on the
consolidated balance sheets.
In April 2010 the Company issued a promissory note payable to
its major investor in the amount of $800,000, with an annual
interest rate of 8% and a maturity date of May 31, 2010. In
June 2010 the Company issued a promissory note payable to the
same major investor in the amount of approximately $14,065,000,
with an annual interest rate of 8% and a maturity date of
June 30, 2010. The Company used the proceeds from this note
payable to repay the balance of its then outstanding bank debt
under the line of credit and note payable agreements with a
financial institution (see Notes 2 and 3).
Effective June 18, 2010, TrustWave Holdings, Inc. acquired
Breach Security, Inc. and Subsidiaries in a transaction whereby
a subsidiary of TrustWave Holdings, Inc. was merged into Breach
Security, Inc., under the name of TW Breach Security, Inc. In
connection with this acquisition, all of the issued and
outstanding shares of the Companys preferred stock were
converted into shares of the Class A Voting Common Stock of
Trustwave Holdings, Inc. All of the issued and outstanding
shares of common stock were cancelled and extinguished without
any conversion thereof and without payment of any consideration
therefore. Additionally, all previously issued warrants and
options were cancelled without any conversion for payment of
consideration. Immediately prior to the effective time of the
merger, Trustwave Holdings, Inc. issued shares of its
Class A Voting Common Stock to the holders of the
Companys outstanding promissory notes in full satisfaction
of the obligations of the Company pursuant to such promissory
notes.
The Company has evaluated subsequent events through
October 15, 2010, which is the date the financial
statements were available to be issued.
F-78
INDEPENDENT
AUDITORS REPORT
Breach Security, Inc. and Subsidiaries
Carlsbad, California
We have audited the accompanying consolidated balance sheets of
Breach Security, Inc. and Subsidiaries (a Delaware
Corporation) as of December 31, 2009 and 2008, and the
related consolidated statements of operations,
stockholders deficit and cash flows for the years then
ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the
2009 and 2008 financial statements of Breach Security, Ltd., a
foreign subsidiary of the Company, whose statements reflect
total assets of approximately $599,000 and $709,000 as of
December 31, 2009 and 2008, respectively. Those statements
were audited by other auditors, whose report has been furnished
to us, and our opinion, insofar as it relates to the 2009 and
2008 amounts included for Breach Security, Ltd., is based solely
on the report of the other auditors.
We conducted our audits in accordance with U.S. generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other
auditors for 2009 and 2008, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Breach
Security, Inc. and Subsidiaries as of December 31, 2009 and
2008, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
/s/ Mayer Hoffman McCann P.C.
San Diego, CA
September 1, 2010
F-79
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
982,578
|
|
|
$
|
3,717,537
|
|
Trade accounts receivable net
|
|
|
973,265
|
|
|
|
1,489,479
|
|
Inventories net
|
|
|
132,316
|
|
|
|
129,652
|
|
Prepaid expenses and other current assets
|
|
|
569,674
|
|
|
|
505,351
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,657,833
|
|
|
|
5,842,019
|
|
Fixed Assets Net
|
|
|
382,984
|
|
|
|
495,339
|
|
Capitalized Software Net
|
|
|
364,577
|
|
|
|
599,918
|
|
Deposits
|
|
|
26,552
|
|
|
|
43,352
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,431,946
|
|
|
$
|
6,980,628
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Current portion of note payable
|
|
|
1,000,000
|
|
|
|
333,333
|
|
Note payables related parties
|
|
|
7,299,934
|
|
|
|
3,000,000
|
|
Accounts payable
|
|
|
279,069
|
|
|
|
361,590
|
|
Accrued expenses and other current liabilities
|
|
|
1,951,205
|
|
|
|
1,318,736
|
|
Deferred revenue
|
|
|
1,456,117
|
|
|
|
991,973
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
12,986,325
|
|
|
|
7,005,632
|
|
Note payable, less current portion
|
|
|
1,666,667
|
|
|
|
2,666,667
|
|
Other liabilities
|
|
|
80,476
|
|
|
|
132,292
|
|
Deferred revenue
|
|
|
120,444
|
|
|
|
102,269
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
14,853,912
|
|
|
|
9,906,860
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
Redeemable Convertible Preferred stock, $0.001 par value;
48,272,927 shares authorized:
|
|
|
|
|
|
|
|
|
Series B 38,558,333 shares designated;
38,125,000 shares issued and outstanding at both 2009 and
2008 (liquidating preference $22,875,000)
|
|
|
38,125
|
|
|
|
38,125
|
|
Series A 9,714,594 shares designated;
9,687,094 shares issued and outstanding at both 2009 and
2008 (liquidating preference $9,687,094)
|
|
|
9,688
|
|
|
|
9,688
|
|
Common stock, $0.001 par value; 66,450,000 shares
authorized;
|
|
|
|
|
|
|
|
|
2,717,467 and 3,329,906 shares issued and outstanding
|
|
|
|
|
|
|
|
|
at 2009 and 2008, respectively
|
|
|
2,717
|
|
|
|
3,329
|
|
Additional paid-in capital
|
|
|
34,985,716
|
|
|
|
34,890,336
|
|
Accumulated deficit
|
|
|
(46,458,212
|
)
|
|
|
(37,867,710
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Deficit
|
|
|
(11,421,966
|
)
|
|
|
(2,926,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,431,946
|
|
|
$
|
6,980,628
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-80
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
5,609,720
|
|
|
$
|
6,075,703
|
|
Cost of revenues
|
|
|
1,644,870
|
|
|
|
1,885,367
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,964,850
|
|
|
|
4,190,336
|
|
Sales and marketing expenses
|
|
|
5,491,093
|
|
|
|
7,340,361
|
|
Research and development expenses
|
|
|
3,129,304
|
|
|
|
3,375,571
|
|
General and administrative expenses
|
|
|
2,976,015
|
|
|
|
3,699,209
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(7,631,562
|
)
|
|
|
(10,224,805
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(652,369
|
)
|
|
|
(298,281
|
)
|
Other expense
|
|
|
(1,448
|
)
|
|
|
(157
|
)
|
Interest income
|
|
|
5,783
|
|
|
|
20,248
|
|
Other income
|
|
|
4,500
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
(643,534
|
)
|
|
|
(228,190
|
)
|
|
|
|
|
|
|
|
|
|
Loss Before Income Taxes
|
|
|
(8,275,096
|
)
|
|
|
(10,452,995
|
)
|
Income tax provision
|
|
|
315,406
|
|
|
|
39,279
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(8,590,502
|
)
|
|
$
|
(10,492,274
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-81
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
Series A
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance at December 31, 2007
|
|
|
21,041,666
|
|
|
$
|
21,042
|
|
|
|
9,687,094
|
|
|
$
|
9,688
|
|
|
|
2,831,044
|
|
|
$
|
2,830
|
|
|
$
|
24,427,031
|
|
|
$
|
(27,375,436
|
)
|
|
$
|
(2,914,845
|
)
|
Issuance of Series B preferred stock
|
|
|
17,083,334
|
|
|
|
17,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,232,917
|
|
|
|
|
|
|
|
10,250,000
|
|
Issuance of common stock for options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498,862
|
|
|
|
499
|
|
|
|
49,387
|
|
|
|
|
|
|
|
49,886
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,063
|
|
|
|
|
|
|
|
103,063
|
|
Fair value of warrants issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,938
|
|
|
|
|
|
|
|
77,938
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,492,274
|
)
|
|
|
(10,492,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
38,125,000
|
|
|
|
38,125
|
|
|
|
9,687,094
|
|
|
|
9,688
|
|
|
|
3,329,906
|
|
|
|
3,329
|
|
|
|
34,890,336
|
|
|
|
(37,867,710
|
)
|
|
|
(2,926,232
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(627,281
|
)
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
(627
|
)
|
Issuance of common stock for options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,842
|
|
|
|
15
|
|
|
|
1,469
|
|
|
|
|
|
|
|
1,484
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,911
|
|
|
|
|
|
|
|
93,911
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,590,502
|
)
|
|
|
(8,590,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
38,125,000
|
|
|
$
|
38,125
|
|
|
|
9,687,094
|
|
|
$
|
9,688
|
|
|
|
2,717,467
|
|
|
$
|
2,717
|
|
|
$
|
34,985,716
|
|
|
$
|
(46,458,212
|
)
|
|
$
|
(11,421,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-82
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,590,502
|
)
|
|
$
|
(10,492,274
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
462,900
|
|
|
|
420,693
|
|
Stock-based compensation
|
|
|
93,911
|
|
|
|
103,063
|
|
Excess and obsolete inventory reserve
|
|
|
96,673
|
|
|
|
238,093
|
|
Provision for bad debts
|
|
|
28,130
|
|
|
|
4,902
|
|
Amortization of debt discount
|
|
|
19,289
|
|
|
|
7,233
|
|
Loss on disposal of fixed assets
|
|
|
1,449
|
|
|
|
|
|
Fair value of warrants issued
|
|
|
|
|
|
|
77,938
|
|
Amortization of note discount
|
|
|
|
|
|
|
8,080
|
|
Increase (decrease) in cash resulting from changes in:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
488,084
|
|
|
|
(106,826
|
)
|
Inventories
|
|
|
(99,337
|
)
|
|
|
(167,606
|
)
|
Prepaid expenses and other current assets
|
|
|
(83,612
|
)
|
|
|
(215,984
|
)
|
Deposits
|
|
|
16,800
|
|
|
|
(3,377
|
)
|
Accounts payable
|
|
|
(82,521
|
)
|
|
|
(140,427
|
)
|
Accrued expenses and other current liabilities
|
|
|
632,469
|
|
|
|
11,632
|
|
Deferred revenue
|
|
|
482,319
|
|
|
|
387,761
|
|
Other liabilities
|
|
|
(51,816
|
)
|
|
|
72,514
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
|
(6,585,764
|
)
|
|
|
(9,794,585
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(116,653
|
)
|
|
|
(328,553
|
)
|
Payment in connection with acquisition
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(116,653
|
)
|
|
|
(578,553
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable
|
|
|
4,299,934
|
|
|
|
8,900,000
|
|
Principal payments on notes payable
|
|
|
(333,333
|
)
|
|
|
(3,266,244
|
)
|
Proceeds from exercise of stock options
|
|
|
1,484
|
|
|
|
49,886
|
|
Repurchase of common stock
|
|
|
(627
|
)
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
7,836,608
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
3,967,458
|
|
|
|
13,520,250
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(2,734,959
|
)
|
|
|
3,147,112
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
3,717,537
|
|
|
|
570,425
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
982,578
|
|
|
$
|
3,717,537
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
241,229
|
|
|
$
|
302,247
|
|
Income taxes
|
|
$
|
5,121
|
|
|
$
|
1,600
|
|
Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
During 2008 the Company issued 4,022,414 shares of
series B Preferred Stock valued at $0.60 per share in lieu
of repayment of $2,400,000 in notes payable and approximately
$13,400 in accrued interest.
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-83
BREACH
SECURITY, INC. AND SUBSIDIARIES
|
|
1.
|
Summary
of Significant Accounting Policies
|
A summary of the Companys significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements follows.
Nature
of Operations
Breach Security, Inc. (the Company), a
Delaware corporation, was incorporated in May 2004. The Company
is organized to develop web application firewalls that protect
against online attacks bypassed by traditional network security
solutions. The Company also provides security assessment
services as well as training and support for its products.
The Company has two wholly-owned subsidiaries, Breach Security,
Ltd. in Herzliya, Israel and Breach Security (UK) Limited, in
the United Kingdom. The Companys principal market is the
United States and Europe with potential to expand into other
areas of the world.
In June 2010, the Company was acquired by TrustWave Holdings,
Inc. (see Note 13).
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Use of
Estimates
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates. Significant
estimates used in preparing the consolidated financial
statements include those assumed in computing the allowance for
uncollectible accounts receivable, the reserve for obsolete
inventory, the valuation allowance on deferred tax assets,
testing intangible assets for impairment, certain accrued
liability account balances, and stock-based compensation expense.
Liquidity
At December 31, 2009, the Company had an accumulated
deficit of approximately $46,458,000 and a net loss of
approximately $8,591,000. The Company also had negative cash
flows from operations of approximately $6,586,000 for the year
ended December 31, 2009.
During 2010 the Company obtained $16,665,000 in debt financing
from its major investor.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
original maturities of 90 days or less to be cash
equivalents.
Accounts
Receivable
The Company has established an allowance for doubtful accounts
for potential credit losses that are expected to be incurred,
based on historical information and specific identification.
Trade receivables deemed uncollectible are written off against
the allowance.
The allowance for doubtful accounts at December 31, 2009
and 2008 was approximately $102,000 and $75,000, respectively.
F-84
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
Inventories are stated at the lower of cost
(first-in,
first-out) or market, and consist primarily of finished goods.
At December 31, 2009 and 2008, the Company has provided a
reserve for obsolete inventory of approximately $328,000 and
$285,000, respectively.
Fixed
Assets and Depreciation
Property and equipment are carried at cost. Expenditures that
extend the life of the asset are capitalized and depreciated.
Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the
related assets or, in the case of leasehold improvements, over
the lesser of the useful life of the related asset or the lease
term. The estimated useful life of the fixed assets range
between three to fourteen years.
Impairment
of Long-Lived Assets
In accordance with authoritative guidance related to accounting
for the impairment or disposal of long-lived assets, management
reviews the Companys long-lived assets, including property
and equipment and capitalized software, for impairment whenever
events or changes in circumstances indicate that their carrying
amounts may not be recoverable. To determine recoverability of
its long-lived assets, the Company evaluates whether future
undiscounted net cash flows will be less than the carrying
amount of the assets and adjusts the carrying amount of its
assets to fair value. Management has determined that no
impairment of long-lived assets occurred in 2009 or 2008.
Foreign
Currency
The U.S. dollar is the functional currency of the Companys
foreign subsidiaries. Assets and liabilities are translated at
the current year end exchange rate, equity at the historical
rate, and income statement items at the weighted average
exchange rate for the period. Translation gains or losses are
included in the consolidated statements of operations. For 2009
and 2008, such gains and losses were insignificant.
Stock
Options
The Company accounts for stock options issued to employees in
accordance with the authoritative guidance on stock
compensation. Under this guidance, stock based compensation cost
is measured at the grant date, based on the calculated fair
value of the award. The cost is recognized as an expense, under
the straight-line method, over the employees requisite
service period, which is generally the vesting period of the
equity grant.
Income
Taxes
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year
end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the combination of the tax
payable for the year and the change during the year in deferred
tax assets and liabilities. The Company had a federal income tax
expense of approximately $50,000 and $0 for 2009 and 2008,
respectively, and a state income tax expense of approximately
$2,000 and $3,000 for 2009 and 2008, respectively.
The Companys foreign subsidiaries are subject to foreign
corporate income taxes. Deferred U.S. income taxes are not
accrued on undistributed earnings of foreign subsidiaries
because such earnings are permanently reinvested. The
subsidiaries had a foreign income tax expense of approximately
$263,000 and $36,000 for 2009 and 2008, respectively.
F-85
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
In years prior to 2009, the Company recognized revenue in
accordance with authoritative guidance related to the accounting
for software. Under this guidance, the Company used the
residual method to recognize revenue when evidence
of the fair value of all undelivered elements existed. Under the
residual method, the fair value of the undelivered elements
(i.e. maintenance) based on vendor specific objective evidence
of fair value (VSOE) was deferred and the remaining
portion of the arrangement fee was allocated to the delivered
elements (i.e. software license and hardware). The Company
determined VSOE of the fair value of the maintenance services
based on customer renewals. If the Company could not establish
VSOE on the undelivered elements, then all revenue was deferred
and recognized ratably over the maintenance and support
agreements which are typically twelve months.
Effective January 1, 2009, the Company early adopted new
accounting guidance that relates to certain revenue arrangements
that include hardware and software elements. Previously,
companies that sold tangible products with more than
incidental software were required to apply software
revenue recognition guidance. Under the new guidance, tangible
products that have software components that are essential
to the functionality of the tangible product are excluded
from the software revenue recognition guidance. Upon the
adoption of this guidance, the Companys software-enabled
products are now subject to the new guidance for multiple
deliverable arrangements. Under this guidance, because the
Company is unable to establish VSOE or third party evidence
(TPE) for deliverables in an arrangement, it has
applied its best estimate of the selling price to separate
deliverables and allocate arrangement consideration using the
relative selling price method. In estimating the selling price,
the Company considered the cost to provide service, equipment
cost, profit margin, customer demand, the effect of competition
on the product, and other market constraints. After weighting
the relevance of all data, the Company estimated the stand alone
selling price which is included in its published price lists.
The early adoption of this guidance resulted in approximately
$157,000 of additional revenue recognized in 2009 that would
have been deferred as of December 31, 2009, had the Company
elected not to early adopt the provisions of this guidance.
Revenue is recognized when delivery has occurred, there is
persuasive evidence that an arrangement exists, the sales price
is fixed or determinable, and collection is probable. Revenue on
the hardware and embedded software is generally recognized upon
shipment of the unit. Revenue from maintenance and support
agreements is recognized ratably over the contractual period or
as services are performed.
Research
and Development
The Company is actively engaged in new product development
efforts. Research and development expense relating to possible
future products are expensed as incurred.
Advertising
The Company expenses advertising costs as incurred. Advertising
expenses were approximately $223,000 and $139,000 for 2009 and
2008, respectively.
Other
Income
In 2008 the Company received $50,000 in proceeds from its
insurance company as a result of misappropriation of funds by a
former employee during 2006 and 2007. This is recorded as other
income in the consolidated statements of operations.
New
Accounting Standards
In June 2008 the Financial Accounting Standards Board
(FASB) issued new authoritative guidance relating to
the accounting for derivatives and hedging. This guidance
provides direction when assessing whether an equity-linked
financial instrument (or embedded feature) is indexed to an
entitys own stock and the resulting classification of this
instrument as equity or a liability. The guidance provides that
an entity should use a two step approach to
F-86
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including
evaluating the instruments contingent exercise provisions
and settlement provisions. It also clarifies the impact of
foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation.
The Company adopted this guidance effective January 1,
2009, which did not have a material impact on its consolidated
financial statements.
In June 2009 the FASB issued new authoritative guidance that
establishes the FASB Accounting Standards Codification
(Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with GAAP. The FASB will no longer
issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead the
FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right
as they will only serve to update the Codification. The issuance
of this authoritative guidance and the Codification does not
change GAAP. This guidance became effective for the Company for
2009 and did not have a material impact on the Companys
consolidated financial statements.
In August 2006 the Company acquired Breach Security (UK) Limited
(formerly Thinking Stone, Ltd.) (Thinking Stone), a
company organized under the laws of England and Wales. The
acquisition was accounted for in accordance with authoritative
guidance relating to the accounting for business combinations.
The consideration paid by the Company for Thinking Stone
consisted of 1,505,475 shares of the Companys common
stock valued at $150,548, and $1,000,000 due to the former
Thinking Stone shareholder for a total of $1,150,548. Of the
$1,000,000 in payments due, $500,000 was paid upon closing, with
$250,000 paid on August 24, 2007, and $250,000 paid on
August 24, 2008. The Company recorded the liability at its
present value with the discount amortized to interest expense
over the life of the obligation.
The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the
acquisition date. The Company recorded approximately $1,111,000
of identifiable intangible assets and $3,000 in net tangible
assets in connection with this acquisition. The primary reason
for the acquisition and the factors that contributed to the
recognition of an intangible asset related to Thinking
Stones developed software technology.
The purchased technology is being amortized on a straight-line
basis over five years. See Note 4.
3. Fixed
Assets
Fixed assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Computers
|
|
$
|
781,495
|
|
|
$
|
731,314
|
|
Software
|
|
|
158,277
|
|
|
|
123,062
|
|
Furniture and fixtures
|
|
|
135,785
|
|
|
|
126,747
|
|
Equipment
|
|
|
57,461
|
|
|
|
50,903
|
|
Leasehold improvements
|
|
|
48,051
|
|
|
|
36,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,181,069
|
|
|
|
1,068,786
|
|
Less accumulated depreciation and amortization
|
|
|
(798,085
|
)
|
|
|
(573,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
382,984
|
|
|
$
|
495,339
|
|
|
|
|
|
|
|
|
|
|
F-87
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation and amortization expense was approximately $228,000
and $185,000 for 2009 and 2008, respectively, and is included in
general and administrative expenses in the accompanying
consolidated statements of operations.
4. Capitalized
Software
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Purchased technology
|
|
$
|
1,176,720
|
|
|
$
|
1,176,720
|
|
Less accumulated amortization
|
|
|
(812,143
|
)
|
|
|
(576,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
364,577
|
|
|
$
|
599,918
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was approximately $235,000 for 2009 and
2008, and is included in cost of revenues in the accompanying
consolidated statements of operations.
Estimated amortization expense at December 31, 2009 for
each of the two succeeding years is as follows:
|
|
|
|
|
Year Ending December
31,
|
|
|
|
2010
|
|
$
|
221,289
|
|
2011
|
|
$
|
143,288
|
|
The Company has a $1,000,000 line of credit with a bank which
matured on November 30, 2009, and was subsequently extended
to May 15, 2010. Interest is payable monthly at the prime
rate (3.25% at December 31, 2009) plus 4.5%. Advances
on the line are collateralized by substantially all of the
Companys assets. The outstanding balance on the line of
credit was $1,000,000 at December 31, 2009 and 2008. In
June 2010 the Company repaid the outstanding balance on the line
of credit (see Note 13).
In August 2008 the Company entered into a loan and security
agreement with a bank for a $3,000,000 note payable. Interest is
payable in monthly installments at the prime rate (3.25% at
December 31, 2009) plus 2.5%, with the principal and
all unpaid interest due in August 2012. Advances on the note are
collateralized by substantially all of the Companys
assets. The outstanding balance on the note was $2,666,667 and
$3,000,000 at December 31, 2009 and 2008, respectively. In
June 2010 the Company repaid the balance of the note payable in
full (see Note 13).
Future minimum principal payments on the note payable are as
follows:
|
|
|
|
|
Year Ending December
31,
|
|
|
|
|
2010
|
|
$
|
1,000,000
|
|
2011
|
|
|
1,000,000
|
|
2012
|
|
|
666,667
|
|
|
|
|
|
|
Total
|
|
$
|
2,666,667
|
|
|
|
|
|
|
The note payable and security agreement contain certain
non-financial covenants. Management is not aware of any
violations of these covenants at December 31, 2009.
F-88
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company entered into various notes payable with related
parties during 2008 and 2009. See Note 10.
Breach Security, Inc. is authorized to issue
66,450,000 shares of common stock and
48,272,927 shares of preferred stock with a par value of
$0.001 per share.
Common
Stock
During 2009 and 2008 the Company issued 14,842 and
498,862 shares of common stock, respectively, upon exercise
of stock options at $0.10 per share.
During 2009 the Company repurchased and retired
627,281 shares of common stock at $0.001 per share.
Preferred
Stock
During February and June 2008 the Company issued an aggregate of
17,083,334 shares of Series B preferred stock at a
price of $0.60 per share. 13,060,920 shares were issued for
total proceeds of approximately $7,837,000. The remaining
4,022,414 shares were issued in lieu of repayment of
$501,000 in notes payable and accrued interest that were
outstanding at December 31, 2007 to two investors and
approximately $1,912,000 of notes payable and accrued interest
that were issued to investors during 2008.
Dividends
The holders of each series of preferred stock are entitled to
receive, when, as and if declared by the Board of Directors, out
of the funds legally available, cash dividends on each share of
preferred stock held at a rate of $0.048 and $0.080 per share of
each of Series B and A preferred stock, respectively.
Dividends shall not be cumulative.
The holders of Series B preferred stock have preference
over all other capital stock holders. Upon full payment to the
Series B preferred stock holders, the holders of
Series A preferred stock, in preference to the holders of
common stock, will be paid accordingly.
Additionally, the holders of Series A and B preferred stock
are entitled to receive, when, as and if declared by the Board
of Directors to the holders of common stock, a proportionate
share of any distribution as though such holders were the
holders of the number of shares of common stock into which their
respective shares of preferred stock are convertible as of the
record date fixed for the determination of the holders of common
stock entitled to receive such distribution.
Liquidation
Preference
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of
Series B preferred stock then outstanding will be entitled
to be paid out of the assets of the Company available for
distribution before any payment will be made to the holders of
Series A preferred stock or common stock, an amount equal
to the sum of $0.60 per share, plus any declared but unpaid
dividends.
If, upon any such liquidation event, the remaining assets of the
Company available for distribution are insufficient to pay the
holders of Series B preferred stock the full amount of the
Series B liquidation payment, each of the holders of
Series B preferred stock will share ratably in any
distribution of the remaining assets and funds of the Company in
proportion to the respective amounts which would otherwise be
payable.
After the payment of the full Series B liquidation payment,
the holders of Series A preferred stock will be entitled to
be paid out of the assets of the Company available for
distribution before any payment will be made to the holders of
common stock, an amount equal to $1.00 per share, plus any
declared but unpaid dividends.
F-89
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If upon any such liquidation event, after payment of the
Series B liquidation payment, the remaining assets of the
Company available for distribution are insufficient to pay the
holders of Series A preferred stock the full amount of the
Series A liquidation payment, each of the holders of
Series A preferred stock will share ratably in any
distribution of the remaining assets and funds of the Company in
proportion to the respective amounts which would otherwise be
payable.
After payment of the full preferred stock liquidation payments,
the remaining funds and assets of the Company legally available
for distribution will be distributed ratably to the holders of
common stock, Series A and B preferred stock on an as
if converted to common stock basis.
Voting
Rights
Each outstanding share of Series A and B preferred stock
are entitled to a number of votes equal to the number of whole
shares of common stock into which such shares of preferred stock
are then convertible.
Conversion
Each share of Series A and B preferred stock are
convertible, at the option of the holder, at any time into such
number of fully paid and nonassessable shares of common stock
determined by dividing $0.81 for Series A preferred stock
and $0.60 for Series B preferred stock by the then
effective Series A or B conversion price, respectively, and
are subject to adjustment. Initially the conversion price was
$1.00 for Series A and $0.60 for Series B preferred
stock, respectively.
All shares of Series A and B preferred stock will
automatically convert into shares of common stock, at the then
effective conversion price, at any time upon the affirmative
election of the holders of at least a majority of the then
outstanding shares of Series A and B preferred stock voting
together as a single class on an as-converted to common stock
basis or at any time upon the closing of the sale of shares of
common stock in a public offering provided that the offering
price per share is not less than $1.80 and the aggregate
proceeds are not less than $25,000,000.
Optional
Redemption
The holders of at least 66.7% percent of the then outstanding
shares of Series A or B preferred stock, voting as a
separate class, may require the Company to redeem all of the
shares of preferred stock out of funds legally available in
three equal annual installments beginning on May 25, 2011.
The Company will redeem the shares by paying in cash a sum equal
to the Series A and B liquidation amount, as applicable, in
effect as of the redemption date.
Warrants
In October 2004 the Company issued warrants to purchase
20,000 shares of Series A preferred stock. The
warrants have an exercise price of $1.00 and expire in October
2011. None of the warrants have been exercised as of
December 31, 2009.
In February 2006 the Company issued warrants to purchase
7,500 shares of Series A preferred stock at an
exercise price of $1.00 per share. The warrants are exercisable
any time until February 2013. None of the warrants have been
exercised as of December 31, 2009.
In July 2007 the Company issued warrants to purchase
200,000 shares of Series B preferred stock at an
exercise price of $0.60 per share. The warrants are exercisable
any time until July 2014. None of the warrants have been
exercised as of December 31, 2009.
During August 2008 in connection with the line of credit and
note payable issued to a bank, the Company issued warrants to
purchase 200,000 shares of Series B preferred stock.
The exercise price of the warrants is $0.60 per share and the
warrants are exercisable any time until August 2018. None of the
warrants have been exercised as of December 31, 2009.
During 2008 the Company recorded approximately $78,000 related
to the fair value of the
F-90
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
warrants issued. The warrants were valued using the
Black-Scholes pricing model and the following assumptions:
contractual term of 10 years, an average risk free interest
rate of 3.91%, a dividend yield of 0%, and volatility of 50%.
This amount is presented as a discount to the carrying value of
the related debt, and is accreted as interest expense over the
life of the debt.
Subsequent to December 31, 2009, all outstanding warrants
were cancelled.
Stock
Options
During 2004 the Company adopted the 2004 USA and Israel Stock
Option Plan, as amended, (the Plan) which provides
for the granting of stock options, restricted stock, or stock
appreciation rights (SAR) to employees, directors,
and consultants. The exercise price for options granted under
the Plans may not be less than their fair market value. The Plan
terminates on the earlier of ten years or the date on which all
available options are issued and fully vested. Options generally
vest over four years, with a 25% cliff vesting on the first
anniversary of the grant date, and then 1/48th monthly, and
expire no later than ten years from the date of grant. With
respect to incentive options, the exercise price for a stock
option granted to someone with greater than 10% of the total
combined voting power of all classes of stock of the Company
shall not be less than 110% of the fair market value per share
of common stock on the option grant date. Additionally, with
respect to incentive options, the aggregate fair market value of
the shares of common stock for which options granted to any
employee under the Plan that may become exercisable during any
one calendar year shall not exceed $100,000. The Company has
reserved 13,057,204 shares of common stock for issuance
under the Plan.
The Company uses the Black-Scholes valuation model to calculate
the fair value of stock options. The fair value of stock options
was measured at the grant date using the weighted average
assumptions in the table below:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Expected volatility
|
|
|
37.6
|
%
|
|
|
53.3
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.3
|
%
|
|
|
2.8
|
%
|
Expected terms in years
|
|
|
6.0
|
|
|
|
6.2
|
|
Expected Volatility The expected volatility
is based on a peer group in the industry in which the Company
does business.
Dividend Yield The Company has not, and does
not, intend to pay dividends.
Risk-free Interest Rate The Company applies
the risk-free interest rate based on the U.S. Treasury yield in
effect at the time of the grant.
Expected Term in Years The expected term is
based upon the Companys consideration of the historical
life of options, the vesting period of the option granted and
the contractual period of the option granted. The Company
calculated the expected term as the average of the contractual
term of the option and the vesting period, consistent with
authoritative guidance.
Weighted Average Fair Value of Options
Granted Using the weighted average assumptions
described above, the weighted average fair value of options
granted was $0.04 and $0.06 for 2009 and 2008, respectively.
Forfeitures Stock-based compensation expense
recognized in the consolidated statements of operations is based
on awards ultimately expected to vest, reduced for estimated
forfeitures. The authoritative guidance related to the
accounting for stock compensation requires forfeitures to be
estimated at the time of grant and revised, if
F-91
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures were estimated based on
historical experience.
Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by employees who
receive equity awards, and subsequent events are not indicative
of the reasonableness of the original estimates of fair value
made by the Company under the authoritative guidance.
A summary of stock option activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Options outstanding at December 31, 2007
|
|
|
7,620,156
|
|
|
$
|
0.10
|
|
Granted
|
|
|
7,062,136
|
|
|
$
|
0.11
|
|
Exercised
|
|
|
(498,862
|
)
|
|
$
|
0.10
|
|
Cancelled/forfeited
|
|
|
(3,455,833
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2008
|
|
|
10,727,597
|
|
|
$
|
0.11
|
|
Granted
|
|
|
135,000
|
|
|
$
|
0.11
|
|
Exercised
|
|
|
(14,842
|
)
|
|
$
|
0.10
|
|
Cancelled/forfeited
|
|
|
(4,580,718
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2009
|
|
|
6,267,037
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, there were 4,185,035 stock options
outstanding and exercisable with a weighted average remaining
contractual life of 6.8 years and a weighted average
exercise price of $0.10 per share. The weighted average
remaining contractual life for all options outstanding at
December 31, 2009 was 7.3 years. The total fair value
of shares vested during 2009 was $142,698.
The aggregate intrinsic value of options outstanding and
exercisable at December 31, 2009 was $26,939, based on the
difference between the exercise price and the value of the
Companys stock of $0.11 at December 31, 2009. The
intrinsic value of options exercised for 2009 was $148.
During 2009 and 2008, total stock-based compensation expense
included in the consolidated statements of operations of $93,911
and $103,063, respectively, was charged as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Selling and marketing
|
|
$
|
41,816
|
|
|
$
|
36,119
|
|
General and administrative
|
|
|
31,722
|
|
|
|
45,369
|
|
Research and development
|
|
|
18,837
|
|
|
|
21,575
|
|
Cost of revenues
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
93,911
|
|
|
$
|
103,063
|
|
|
|
|
|
|
|
|
|
|
The Company has a 100% valuation allowance recorded against its
deferred tax assets; therefore, the stock-based compensation has
no tax effect on the consolidated statements of operations.
F-92
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, there was $71,729 of total unrecognized
compensation expense related to unvested share-based
compensation arrangements granted under the Plan. The cost is
expected to be recognized over a weighted-average period of
2.2 years.
Subsequent to December 31, 2009, all options under the Plan
were cancelled and the Company terminated the Plan.
As of December 31, 2009 and 2008, a current deferred tax
asset of approximately $262,000 and $252,000, respectively, had
been recognized for the temporary differences primarily related
to the reserve for uncollectible accounts receivable, the
reserve for obsolete inventory and accrued expenses.
As of December 31, 2009 and 2008, a non-current deferred
tax asset of approximately $2,983,000 and $14,150,000,
respectively, had been recognized for the temporary differences
primarily related to a carryforward of unused net operating
losses, capitalized research and development costs, and
depreciation of fixed assets.
On February 17, 2009 the Company had a change in ownership
(as defined by Section 382 of the Internal Revenue Code).
As such, the Companys net operating losses generated from
years prior to the change in ownership are no longer available
to be used and accordingly resulted in a significant reduction
in the non-current deferred tax asset as of December 31,
2009.
In assessing the realizability of deferred tax assets, the
Company considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The Company believes that it does not have a sufficient history
of taxable income to justify recognizing its net deferred tax
asset. Accordingly, the net deferred tax asset has been
completely offset by a valuation allowance. The valuation
allowance at December 31, 2009 and 2008 was approximately
$3,245,000 and $14,402,000, respectively.
At December 31, 2009, the Company had unused federal and
state net operating loss carryforwards of approximately
$4,603,000 and $4,600,000, respectively. The federal and state
tax loss carryforwards will begin to expire in 2030 and 2020,
respectively. The California net operating losses have been
suspended for the 2008 and 2009 tax year.
Effective January 1, 2009, the Company adopted the
authoritative guidance related to uncertain tax positions. The
Company identified uncertain tax positions primarily associated
with penalties for late filing of certain information returns
related to its foreign subsidiaries for the years 2005, 2006,
and 2007, a potential assessment as a result of an audit of the
2004 and 2005 tax years by the State of Israel, and other
foreign income taxes related to the Companys operations.
The Company recorded a reserve of approximately $256,000 as a
result of the uncertainties surrounding these positions, which
is included in accrued expenses in the consolidated balance
sheets.
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense. As of December 31, 2009, the Company
recognized approximately $50,000 in interest and penalties
associated with its unrecognized tax benefits. The Company does
not expect the total amount of unrecognized tax benefits to
significantly increase or decrease within the next twelve months.
The Companys federal and state filings from inception to
date are all subject to examination.
|
|
9.
|
Employee
Benefit Plans
|
401(k)
Plan
The Company sponsors a 401(k) savings plan (the
Plan) for all eligible employees. Participants may
contribute up to 90% of their eligible compensation, subject to
a certain dollar limit which is set by law. The Company may
match a uniform percentage of the compensation that will be
determined each year by the Company. The Company made no
contributions to the Plan for 2009 and 2008.
F-93
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Management
Participation Bonus Plan
During 2008 the Company adopted a Management Participation Bonus
Plan (the Bonus Plan) for all eligible employees.
Under the Bonus Plan, participants are eligible to receive a
bonus payment at the time the Company undergoes a Change of
Control Transaction, as defined in the agreement, if the
participant chooses not to receive any payment for their shares
of the Companys stock and options that, in each case, were
previously awarded under the Companys stock option plan.
The one-time bonus payment will be available only to the extent
that there are sufficient proceeds from any Change of Control
Transaction.
Subsequent to December 31, 2009, the Plan was cancelled.
|
|
10.
|
Related
Party
Transactions
|
At various times during 2007 and 2008 the Company issued
promissory notes payable to its major investors in the aggregate
amount of $5,400,000, with an annual interest rate of 8%. Notes
totaling $2,400,000 were converted into Series B preferred
stock during 2008 (see Note 7). The remaining notes
totaling $3,000,000 were outstanding at December 31, 2009
and 2008. The maturity date on the notes was initially
March 31, 2009, and was subsequently extended to
May 31, 2010, subject to the Company first satisfying its
obligations under it notes payable and line of credit to a
financial institution.
At various times during 2009 the Company issued promissory notes
payable to its major investors in the aggregate amount of
approximately $4,300,000. The notes bear an annual interest rate
of 8% and mature on April 30, 2010, subject to the Company
first satisfying its obligations under it notes payable and line
of credit to a financial institution. Approximately $2,000,000
of these promissory notes are convertible into Series B
preferred stock at a conversion rate of $0.45, or into shares of
the Companys equity securities sold in any subsequent
equity financing transaction at 75% of the price per share for
such shares. No amounts were converted during 2009.
Subsequent to December 31, 2009 the Company issued
$16,665,000 in notes payable to one of its investors. See
Note 13.
|
|
11.
|
Commitments
and Contingencies
|
Operating
Leases
The Company leases office space under non-cancelable operating
leases. Certain of these leases include renewal and purchase
options. Rent expense under these leases was approximately
$430,000 and $424,000 for 2009 and 2008, respectively.
Certain of these leases provide for future fixed increases over
the term of the lease, which are recorded to expense on a
straight-line basis. The amount recorded as deferred rent is
included in accrued expenses in the consolidated balance sheets
and represents the amount of rent expense recorded in excess of
cash payments made to be deferred against future payments over
the latter portion of the lease term. Deferred rent was
approximately $163,000 as of December 31, 2009. The
deferred rent balance as of December 31, 2008 was
insignificant.
Future minimum rental payments required under operating leases
that have initial or remaining non-cancelable lease terms in
excess of one year are as follows:
|
|
|
|
|
Year Ending December
31,
|
|
|
|
|
2010
|
|
$
|
378,356
|
|
2011
|
|
|
338,876
|
|
2012
|
|
|
203,101
|
|
|
|
|
|
|
Total
|
|
$
|
920,333
|
|
|
|
|
|
|
F-94
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued
Severance
Under Israeli law and in accordance with employment agreements,
the Companys Israeli subsidiary is required to make
severance payments to terminated employees. This liability is
computed for each employee based on the latest monthly salary
multiplied by the number of years of service. The Company is
obligated to pay the difference between the amount of the
liability computed and the amounts funded by Company insurance
policies. As of December 31, 2009 and 2008, the Company had
accrued severance of approximately $80,000 and $132,000,
respectively, which is included in other liabilities on the
consolidated balance sheets.
Credit
Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
trade accounts receivable. Accounts receivable are primarily
derived from revenue earned from customers located in North
America. The Company performs ongoing credit evaluations of its
customers financial condition and, generally requires no
collateral.
The Company maintains cash balances at various financial
institutions primarily located in San Diego. Accounts at
these institutions are secured by the Federal Deposit Insurance
Corporation. At times the cash at these institutions may exceed
federally insured limits. The Company has not experienced any
losses in such accounts. Management believes that the Company is
not exposed to any significant credit risk on cash and cash
equivalents.
Supplier
During 2009 and 2008 the Company had purchases from two and one
major vendors that comprised approximately $776,000 and
$835,000, respectively, of the total purchases for the year.
Management believes that the Company is not exposed to any
significant concentration risk related to purchases from these
suppliers.
Foreign
Assets
Included in the Companys consolidated balance sheets are
the net assets of the Companys Israel and
United Kingdom operations. The net assets represented
approximately 2.0% and 2.7% of consolidated assets at
December 31, 2009 and 2008, respectively. Management does
not believe the Company is exposed to any risk regarding these
assets.
At various times in 2010 the Company issued four promissory
notes payable to its major investor in the aggregate amount of
$2,600,000, with an annual interest rate of 8% and a maturity
date of May 31, 2010. In June 2010, the Company issued a
promissory note payable to the same major investor in the amount
of approximately $14,065,000, with an annual interest rate of 8%
and a maturity date of June 30, 2010. The Company used the
proceeds from this note payable to repay the balance of its then
outstanding bank debt under the line of credit and note payable
agreements with a financial institution (see Notes 5 and 6).
Effective June 18, 2010, TrustWave Holdings, Inc. acquired
Breach Security, Inc. and Subsidiaries in a transaction whereby
a subsidiary of TrustWave Holdings, Inc. was merged into Breach
Security, Inc., under the name of TW Breach Security, Inc. In
connection with this acquisition, all of the issued and
outstanding shares of the Companys preferred stock were
converted into shares of the Class A Voting Common Stock of
Trustwave Holdings, Inc. All of the issued and outstanding
shares of common stock were cancelled and extinguished without
any conversion thereof and without payment of any consideration
therefore. Additionally, all previously issued warrants and
options were cancelled without any conversion for payment of
consideration. Immediately prior to the effective time of the
merger, Trustwave Holdings, Inc. issued shares of its
Class A Voting Common Stock to the holders of the
F-95
BREACH
SECURITY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys outstanding promissory notes in full satisfaction
of the obligations of the Company pursuant to such promissory
notes.
The Company has evaluated subsequent events through
September 1, 2010, which is the date the financial
statements were available to be issued.
F-96
INDEPENDENT
AUDITORS REPORT
To the Board of Directors
BitArmor Systems, Inc.
Pittsburgh, Pennsylvania
We have audited the accompanying balance sheets of BitArmor
Systems, Inc. (a Development Stage Company) as of
December 31, 2009 and 2008, and the related statements of
operations, stockholders deficit and cash flows for the
years ended December 31, 2009 and 2008. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
Except as discussed in the following paragraph, we conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The 2006 audit was our first audit of the Companys
financial statements and, as instructed, the scope of our
engagement did not include an audit of the statements of
operations for the period May 20, 2003 (inception) to
December 31, 2005 sufficient to enable us to express, and
we do not express, an opinion on the consistency of application
of accounting principles with the preceding periods as it
relates to the statements of operations and cash flows.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of BitArmor Systems, Inc. as of December 31, 2009 and 2008,
and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles
generally accepted in the United States of America.
May 24, 2010
Certified
Public Accountants and Business Advisors
A
Professional Corporation
Heinz 57 Center 339 Sixth Avenue 8th
Floor Pittsburgh, PA 15222
[p] 412.281.2501 [f] 412.471.1996
www.alpern.com email@alpern.com
Offices also in West Palm Beach and Stuart, FL
F-97
|
|
|
|
|
|
|
|
|
December 31
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
506,533
|
|
|
$
|
989,913
|
|
Accounts receivable net
|
|
|
240,277
|
|
|
|
|
|
Property and equipment net Note 3
|
|
|
152,258
|
|
|
|
161,766
|
|
Other assets Note 4
|
|
|
200,846
|
|
|
|
109,433
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,099,914
|
|
|
$
|
1,261,112
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Liabilities
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
1,394,700
|
|
|
$
|
2,037,594
|
|
Long-term debt Note 5
|
|
|
992,577
|
|
|
|
1,083,261
|
|
Accounts payable and accrued expenses
|
|
|
775,121
|
|
|
|
244,980
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,162,398
|
|
|
|
3,365,835
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit Note 7
|
|
|
|
|
|
|
|
|
Preferred stock, liquidation preference of $11,883,387
(2009) and $6,374,643 (2008)
|
|
|
21,804
|
|
|
|
13,725
|
|
Common stock
|
|
|
8,926
|
|
|
|
5,526
|
|
Additional paid-in capital
|
|
|
10,712,789
|
|
|
|
5,802,670
|
|
Warrants
|
|
|
18,811
|
|
|
|
15,704
|
|
Deficit accumulated during the development stage
|
|
|
(12,824,814
|
)
|
|
|
(7,942,348
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Deficit
|
|
|
(2,062,484
|
)
|
|
|
(2,104,723
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Deficit
|
|
$
|
1,099,914
|
|
|
$
|
1,261,112
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-98
For the
Years Ended December 31, 2009 and 2008 (Audited) and
For the Period May 20, 2003 (Inception) to
December 31, 2009 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
From Inception
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
License revenue
|
|
$
|
1,099,252
|
|
|
$
|
1,006,614
|
|
|
$
|
2,528,775
|
|
Interest income
|
|
|
10,273
|
|
|
|
23,949
|
|
|
|
137,726
|
|
Other income
|
|
|
113,345
|
|
|
|
5,400
|
|
|
|
302,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
1,222,870
|
|
|
|
1,035,963
|
|
|
|
2,968,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,921,181
|
|
|
|
2,020,155
|
|
|
|
5,511,821
|
|
Research and development
|
|
|
1,921,166
|
|
|
|
1,504,268
|
|
|
|
4,669,170
|
|
General and administrative
|
|
|
2,134,643
|
|
|
|
1,121,020
|
|
|
|
5,349,901
|
|
Interest
|
|
|
106,077
|
|
|
|
78,039
|
|
|
|
217,717
|
|
Other
|
|
|
22,269
|
|
|
|
15,869
|
|
|
|
45,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
6,105,336
|
|
|
|
4,739,351
|
|
|
|
15,793,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,882,466
|
)
|
|
$
|
(3,703,388
|
)
|
|
$
|
(12,824,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-99
For the
Year Ended December 31, 2009 (Audited) and
For the Period May 20, 2003 (Inception) to
December 31, 2009 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Series A-3
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Preferred
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Issuance of common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A preferred stock
|
|
|
391
|
|
|
|
1,139
|
|
|
|
5,965
|
|
Stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
391
|
|
|
|
1,139
|
|
|
|
5,965
|
|
Issuance of Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
1,856
|
|
Stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
391
|
|
|
|
1,139
|
|
|
|
7,821
|
|
Issuance of Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
4,374
|
|
Stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued with term loans Note 5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
391
|
|
|
|
1,139
|
|
|
|
12,195
|
|
Issuance of Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued with term loans Note 5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
$
|
391
|
|
|
$
|
1,139
|
|
|
$
|
12,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Series B
|
|
|
|
|
|
Additional
|
|
|
|
|
|
During the
|
|
|
Total
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
|
|
|
Development
|
|
|
Stockholders
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Warrants
|
|
|
Stage
|
|
|
Equity
|
|
|
$
|
|
|
|
$
|
5,400
|
|
|
$
|
164,600
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
170,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,114
|
)
|
|
|
(76,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,400
|
|
|
|
164,600
|
|
|
|
|
|
|
|
(76,114
|
)
|
|
|
93,886
|
|
|
|
|
|
|
46
|
|
|
|
24,954
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(235,632
|
)
|
|
|
(235,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,446
|
|
|
|
189,554
|
|
|
|
|
|
|
|
(311,746
|
)
|
|
|
(116,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434,284
|
)
|
|
|
(434,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,446
|
|
|
|
189,554
|
|
|
|
|
|
|
|
(746,030
|
)
|
|
|
(551,030
|
)
|
|
|
|
|
|
74
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,980,783
|
|
|
|
|
|
|
|
|
|
|
|
2,988,278
|
|
|
|
|
|
|
|
|
|
|
13,503
|
|
|
|
|
|
|
|
.
|
|
|
|
13,503
|
|
|
|
|
|
|
2
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,123,689
|
)
|
|
|
(1,123,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,522
|
|
|
|
3,184,524
|
|
|
|
|
|
|
|
(1,869,719
|
)
|
|
|
1,327,822
|
|
|
|
|
|
|
|
|
|
|
733,946
|
|
|
|
|
|
|
|
|
|
|
|
735,802
|
|
|
|
|
|
|
|
|
|
|
58,405
|
|
|
|
|
|
|
|
|
|
|
|
58,405
|
|
|
|
|
|
|
1
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,369,241
|
)
|
|
|
(2,369,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,523
|
|
|
|
3,977,278
|
|
|
|
|
|
|
|
(4,238,960
|
)
|
|
|
(246,808
|
)
|
|
|
|
|
|
|
|
|
|
1,731,261
|
|
|
|
|
|
|
|
|
|
|
|
1,735,635
|
|
|
|
|
|
|
|
|
|
|
93,258
|
|
|
|
|
|
|
|
|
|
|
|
93,258
|
|
|
|
|
|
|
3
|
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,704
|
|
|
|
|
|
|
|
15,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,703,388
|
)
|
|
|
(3,703,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,526
|
|
|
|
5,802,670
|
|
|
|
15,704
|
|
|
|
(7,942,348
|
)
|
|
|
(2,104,723
|
)
|
|
8,079
|
|
|
|
|
|
|
|
4,811,763
|
|
|
|
|
|
|
|
|
|
|
|
4,819,842
|
|
|
|
|
|
|
|
|
|
|
98,356
|
|
|
|
|
|
|
|
|
|
|
|
98,356
|
|
|
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,107
|
|
|
|
|
|
|
|
3,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,882,466
|
)
|
|
|
(4,882,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,079
|
|
|
$
|
8,926
|
|
|
$
|
10,712,789
|
|
|
$
|
18,811
|
|
|
$
|
(12,824,814
|
)
|
|
$
|
(2,062,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-101
For the
Years Ended December 31, 2009 and 2008 (Audited) and
For the Period May 20, 2003 (Inception) to
December 31, 2009 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
From Inception
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Cash Provided by (Used for) Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,882,466
|
)
|
|
$
|
(3,703,388
|
)
|
|
$
|
(12,824,814
|
)
|
Adjustments to reconcile net loss to net cash used for operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
58,073
|
|
|
|
46,353
|
|
|
|
145,710
|
|
Common stock and stock options issued for services
|
|
|
101,756
|
|
|
|
93,258
|
|
|
|
336,922
|
|
Accrued interest converted to preferred stock
|
|
|
|
|
|
|
|
|
|
|
8,146
|
|
Accrued interest added to convertible notes
|
|
|
|
|
|
|
3,082
|
|
|
|
16,781
|
|
Amortization of debt discount
|
|
|
5,463
|
|
|
|
3,132
|
|
|
|
8,595
|
|
Changes in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(240,277
|
)
|
|
|
162,901
|
|
|
|
(240,277
|
)
|
Prepaid expenses and other current assets
|
|
|
(104,940
|
)
|
|
|
(4,996
|
)
|
|
|
(194,441
|
)
|
Accounts payable and accrued expenses
|
|
|
530,141
|
|
|
|
45,938
|
|
|
|
775,121
|
|
Deferred revenue
|
|
|
(642,894
|
)
|
|
|
1,642,069
|
|
|
|
1,394,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used for Operating Activities
|
|
|
(5,175,144
|
)
|
|
|
(1,711,651
|
)
|
|
|
(10,573,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used for) investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(35,038
|
)
|
|
|
(76,942
|
)
|
|
|
(272,893
|
)
|
Purchases of certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
(800,000
|
)
|
Proceeds from certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used for Investing Activities
|
|
|
(35,038
|
)
|
|
|
(76,942
|
)
|
|
|
(272,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used for) Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes
|
|
|
|
|
|
|
|
|
|
|
860,000
|
|
Proceeds from long-term debt
|
|
|
397,500
|
|
|
|
1,150,000
|
|
|
|
1,547,500
|
|
Payments on long-term debt
|
|
|
(490,540
|
)
|
|
|
(54,167
|
)
|
|
|
(544,707
|
)
|
Debt acquisition costs
|
|
|
|
|
|
|
(31,480
|
)
|
|
|
(31,480
|
)
|
Proceeds from common stock issuance
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
Proceeds from preferred stock issuance (net of
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance costs)
|
|
|
4,819,842
|
|
|
|
1,468,854
|
|
|
|
9,394,630
|
|
Exercise of stock options
|
|
|
|
|
|
|
876
|
|
|
|
2,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
4,726,802
|
|
|
|
2,534,083
|
|
|
|
11,352,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(483,380
|
)
|
|
|
745,490
|
|
|
|
506,533
|
|
Cash and Cash Equivalents Beginning of period
|
|
|
989,913
|
|
|
|
244,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents End of period
|
|
$
|
506,533
|
|
|
$
|
989,913
|
|
|
$
|
506,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of Non cash Financing Activities
|
Notes converted to preferred stock
|
|
$
|
|
|
|
$
|
266,781
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
Cash paid during the year for interest
|
|
$
|
107,682
|
|
|
$
|
70,254
|
|
|
$
|
211,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-102
Note 1
Summary of Significant Accounting Policies
A. Description
of Business
BitArmor Systems, Inc. (the Company) develops data control
software that enables enterprises to protect and manage
sensitive data across their infrastructures. The patent-pending
technology enables regulatory compliance, risk mitigation and
compliance with internal legal policies.
B. Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. These estimates and assumptions
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. Actual results could
differ from those estimates.
C. Cash
and Cash Equivalents
The Company considers all short-term investments with an
original maturity of three months or less to be cash
equivalents. The Companys cash and cash equivalents are
maintained in two financial institutions located in Pennsylvania
and California.
D. Accounts
Receivable
Accounts receivable are stated at the amount management expects
to collect from outstanding balances. Management provides for
probable uncollectible amounts through a charge to earnings and
a credit to a valuation allowance based on its assessment of the
current status of individual accounts. Balances that are still
outstanding after management has used reasonable collection
efforts are written off through a charge to the valuation
allowance and a credit to trade accounts receivable. No
allowance for uncollectible accounts was recorded at
December 31, 2009 and 2008. Four customers accounted for
approximately 88% of accounts receivable at December 31,
2009. There were no such concentrations at December 31,
2008.
E. Revenue
and Cost Recognition
Revenue is derived principally from the licensing of the
BitArmor DataControl software (the system) under multiple
element arrangements, which include installation, training,
proprietary software, and post-installation services and
support. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, and the fee is fixed
or determinable and probable of collection. Revenue recognition
is evaluated on a
contract-by-contract
basis as terms of each arrangement vary.
The Company has two primary license fee arrangements:
1) term license agreements, and 2) perpetual license
agreements.
License fees from term license agreements are recorded ratably
over the term of the agreement, normally one or three years.
License fees are recorded net of the fair value of any
undelivered element where vendor specific objective evidence of
fair value exists. In the absence of fair value of an
undelivered element, revenue is deferred until such time as the
element is delivered or fair value has been established. Fees
associated with the software installation and training are
recognized upon delivery and acceptance of the software by the
customer. Direct and incremental costs of contracts for which
revenue is deferred or recorded ratably are expensed as
incurred. These costs consist primarily of labor and other costs
associated with the implementation of the software.
For perpetual license agreements, fees associated with the
software installation and training are recognized upon delivery
and acceptance of the software by the customer. License fees are
recorded net of the fair value of any
F-103
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
undelivered element where vendor specific objective evidence of
fair value exists using the residual method. In the absence of
fair value of an undelivered element, revenue is deferred until
such time the element is delivered or fair value has been
established. In those instances where the fair value of an
undelivered element is not substantive, revenue is recognized
ratably over the implied or stated term of the agreement. Fees
attributable to post-installation support, primarily service and
support, are recognized as revenue ratably over the term of the
agreement. Costs related to maintenance obligations are expensed
as incurred.
Two customers accounted for approximately 89% of the
Companys revenues in 2009 and 2008.
F. Property
and Equipment
Property and equipment are stated at cost, including
expenditures for additions and major improvements. Depreciation
is computed on the straight-line and accelerated methods for
financial reporting purposes at rates calculated to amortize
costs over the estimated useful lives of the assets.
Maintenance and repairs which are not considered to extend the
useful lives of assets are charged to operations as incurred.
The cost of assets sold or retired and the related allowances
are removed from the accounts and any resulting gains or losses
are included in other income (expense).
G. Stock-based
Compensation
The Company expenses the fair value of employee stock purchase
plans, stock option grants and similar awards using the modified
prospective method adopted in January 2006.
The modified prospective method requires fair value measurement
of new awards and awards modified, repurchased or cancelled
after the effective date. Additionally, compensation cost for
the portion of outstanding awards for which service had not been
rendered (such as unvested options) that were outstanding as of
the date of adoption are recognized as the remaining services
are rendered. The Company recognizes the fair value of
share-based compensation awards in the statements of operations
on a straight-line basis over the vesting period.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions:
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
3.04%
|
|
1.87%
|
Expected dividend yield
|
|
|
|
|
Expected term
|
|
7 years
|
|
7 years
|
Expected volatility
|
|
42%
|
|
42%
|
The risk-free interest rate is based on the U.S. treasury
yield curve in effect as of the grant date. When establishing
the expected life assumptions, the Company annually reviews
historical employee exercise behavior of option grants and other
economic data impacting the period the stock options are
expected to remain outstanding. Expected volatility is
determined using a benchmark of similar public companies. The
Company based the assumed dividend yield on its expectation of
not paying dividends in the foreseeable future.
Prior to January 1, 2006, the Company accounted for its
stock options in accordance with the intrinsic value method.
Under this method, the difference in the market price on the
date of grant and the contractual purchase price of shares
should be recognized as compensation expense over the vesting
period on a straight-line basis. The Company did not recognize
compensation expense for stock options because the exercise
price approximated the fair value of the underlying common stock
on the date of grant.
F-104
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
H. Research
and Development Expenses
Research and development expenses are charged to operations as
incurred.
I. Intangibles
The Companys intangible assets consist of patent rights,
and are stated at cost. Amortization is computed on the
straight-line method for financial reporting purposes over the
estimated useful lives of the assets.
J. Income
Taxes
The Company provides for income taxes in accordance with the
asset and liability method. Under this method, deferred tax
assets and liabilities are recognized for future tax
consequences attributable to differences between the carrying
amounts of existing assets and liabilities for financial
reporting and for income tax reporting. The deferred tax asset
or liability represents the future tax return consequences of
those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. The
principal differences result from the Company reporting on the
accrual basis of accounting for financial statement purposes and
on the cash basis for income tax reporting purposes. A valuation
allowance is established for any deferred tax asset for which it
is determined that it is more likely than not that some or all
of the deferred tax assets will not be realized.
The Company adopted the accounting standard for uncertain tax
positions as of January 1, 2009. The standard requires a
two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with the asset and
liability method. The first step is to evaluate the tax position
for recognition by determining whether evidence indicates that
it is more likely than not that a position will be sustained if
examined by a taxing authority. The second step is to measure
the tax benefit as the largest amount that is 50% likely of
being realized upon settlement with a taxing authority. The
Company has elected to recognize interest expense and penalties
associated with the adoption of this standard as a component of
income tax expense. The adoption of this accounting standard did
not have an effect on the Companys financial statements.
K. Recent
Accounting Pronouncements
On September 15, 2009, the Financial Accounting Standards
Boards Accounting Standards Codification (Codification)
became the single source of authoritative generally accepted
accounting principles in the United States of America. The
Codification changed the referencing of financial standards but
did not change or alter existing generally accepted accounting
principles in the United States of America. The Codification
became effective for the Company at that date.
L. Subsequent
Events
Management evaluated subsequent events and transactions for
potential recognition through May 24, 2010, the day the
financial statements were approved and authorized for issue.
Note 2
Development Stage Operations
The Company is currently in the development stage of operations.
Operations from inception through December 31, 2009 have
been devoted primarily to raising capital, performing research
and development on the Companys products, and developing
sales channels for the products.
F-105
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
Note 3
Property and Equipment
Property and equipment consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Leasehold improvements
|
|
$
|
11,075
|
|
|
$
|
11,075
|
|
Computer equipment
|
|
|
170,548
|
|
|
|
148,772
|
|
Furniture and fixtures
|
|
|
67,305
|
|
|
|
63,919
|
|
Software
|
|
|
27,019
|
|
|
|
26,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,947
|
|
|
|
249,837
|
|
Less: Accumulated depreciation
|
|
|
123,689
|
|
|
|
88,071
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
152,258
|
|
|
$
|
161,766
|
|
|
|
|
|
|
|
|
|
|
Note 4
Other Assets
Other assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Patent rights and other intangibles net of
accumulated amortization of $15,556 (2009) and $11,029 (2008)
|
|
$
|
58,290
|
|
|
$
|
49,044
|
|
Prepaid expenses and other current assets
|
|
|
58,817
|
|
|
|
28,646
|
|
Debt acquisition costs net of accumulated
amortization of $15,000 (2009) and $6,000 (2008)
|
|
|
16,480
|
|
|
|
25,480
|
|
Other receivables
|
|
|
60,996
|
|
|
|
|
|
Deposits
|
|
|
6,263
|
|
|
|
6,263
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
200,846
|
|
|
$
|
109,433
|
|
|
|
|
|
|
|
|
|
|
Note 5
Debt
Line
of Credit
The Company had a revolving
line-of-credit
agreement with a bank. The arrangement provided for maximum
borrowings of $100,000 with interest at prime. The arrangement
terminated in January 2008. No borrowings were outstanding under
the
line-of-credit
agreement at December 31, 2008.
In January 2008, the Company entered into an unsecured
line-of-credit
agreement with a bank. The unsecured
line-of-credit
agreement provides for maximum borrowings of $50,000 and is
personally guaranteed by the Companys Chief Executive
Officer. Interest on outstanding borrowings is payable monthly
at the banks prime rate
(31/4%
at December 31, 2009) plus
11/4%.
No borrowings were outstanding under the
line-of-credit
agreement at December 31, 2009 and 2008. During 2009, this
line-of-credit
agreement was terminated.
F-106
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
Term
Debt
A summary of outstanding long-term debt is as follows at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Term Loan A
|
|
$
|
379,167
|
|
|
$
|
595,833
|
|
Term Loan B
|
|
|
333,333
|
|
|
|
500,000
|
|
Term Loan C
|
|
|
243,056
|
|
|
|
|
|
Bridge Loan
|
|
|
47,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002,793
|
|
|
|
1,095,833
|
|
Less: Unamortized discount
|
|
|
10,216
|
|
|
|
12,572
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
992,577
|
|
|
$
|
1,083,261
|
|
|
|
|
|
|
|
|
|
|
In March 2008, the Company entered into a growth capital loan
with a bank. The growth capital loan provides for the Company to
borrow funds, designated as Term Loans A and B in accordance
with conditions determined in the agreement. In January 2009,
the Company entered into a $350,000 term loan (Term Loan
C) under the same agreement. The total amount outstanding
under the growth capital loan was $955,556 at December 31,
2009 and $1,095,833 at December 31, 2008.
Monthly principal payments on the loans are as follows:
|
|
|
|
|
|
|
Term Loan A
|
|
$
|
18,056
|
|
|
September 2011
|
Term Loan B
|
|
$
|
13,889
|
|
|
December 2011
|
Term Loan C
|
|
$
|
9,722
|
|
|
December 2011
|
Interest is payable monthly at either the higher of (1) the
banks prime rate plus 2%, or (2) a fixed rate of
81/4%.
The term loans are collateralized by substantially all of the
Companys assets.
In connection with the Term Loans A and B, the Company issued
185,642 detachable warrants to the bank to purchase shares of
the Companys
Series A-3
preferred stock. The warrants are convertible to
Series A-3
preferred stock on a
one-to-one
ratio, at a conversion price of $0.40 per share and expire in
March and June 2015. Management determined the fair value of
each warrant to be approximately $0.08.
In connection with Term Loan C, the Company issued 37,128
detachable warrants to the bank to purchase shares of the
Companys
Series A-3
preferred stock. The warrants are convertible to
Series A-3
preferred stock on a
one-to-one
ratio, at a conversion price of $0.40 per share and expire in
June 2015. Management determined the fair value of each warrant
to be approximately $0.08.
The Company accounted for the warrants issued in connection with
Term Loans A, B and C by allocating the fair value of the
warrants against the loan proceeds as additional paid-in
capital. The fair value of the warrants was recorded as a
discount to the loans and is being amortized over the life of
the loans using the interest method.
In February 2009, the Company entered into a note agreement with
a bank in the amount of $47,500. The Company assigned proceeds
from the sale of research and development tax credits awarded in
2008 as collateral for the note. The note bears interest at a
rate of
41/2%
and is due on March 12, 2010.
F-107
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
Approximate future maturities of long-term debt are as follows:
|
|
|
|
|
Year Ending
|
|
|
|
December 31
|
|
Amount
|
|
|
2010
|
|
$
|
538,000
|
|
2011
|
|
|
465,000
|
|
|
|
|
|
|
|
|
$
|
1,003,000
|
|
|
|
|
|
|
Note 6
Income Taxes
There is no Federal income tax currently payable for 2009 and
prior periods as a result of net operating losses.
At December 31, 2009, the Company had potential deferred
tax assets which consist primarily of net operating loss
carryforwards of approximately $5,344,000. At December 31,
2008, the Company had a potential deferred tax asset, primarily
for net operating loss carryforwards, of approximately
$3,177,000.
The Company has provided an allowance for the entire amount of
the potential deferred tax asset at December 31, 2009 and
2008 because of uncertainty about realizability.
The Company has approximately $10,700,000 in Federal and state
net operating loss carryforwards that are available to offset
future taxable income through 2029.
Note 7
Stockholders Equity
In April 2009, the Company filed a Certificate of Amendment to
its Amended and Restated Articles of Incorporation to increase
the number of authorized shares to 57,281,188. The amendment
authorizes
F-108
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
35,000,000 shares of $0.001 par value common stock and
22,281,188 shares of $0.001 par value preferred stock.
The Companys common and preferred stock is as follows at
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
Series B, $.001 par value
|
|
|
|
|
|
|
|
|
Shares authorized
|
|
|
8,333,350
|
|
|
|
|
|
Shares issued and outstanding
|
|
|
8,079,444
|
|
|
|
|
|
Liquidation preference
|
|
$
|
5,092,874
|
|
|
$
|
|
|
Series A-3,
$.001 par value
|
|
|
|
|
|
|
|
|
Shares authorized
|
|
|
12,417,773
|
|
|
|
12,417,773
|
|
Shares issued and outstanding
|
|
|
12,195,003
|
|
|
|
12,195,003
|
|
Liquidation preference
|
|
$
|
5,998,227
|
|
|
$
|
5,628,719
|
|
Series A-2,
$.001 par value
Shares authorized, issued and outstanding
|
|
|
1,138,615
|
|
|
|
1,138,615
|
|
Liquidation preference
|
|
$
|
589,588
|
|
|
$
|
555,088
|
|
Series A-1,
$.001 par value
Shares authorized, issued and outstanding
|
|
|
391,450
|
|
|
|
391,450
|
|
Liquidation preference
|
|
$
|
202,697
|
|
|
$
|
190,836
|
|
Common stock, $.001 par value
|
|
|
|
|
|
|
|
|
Shares authorized
|
|
|
35,000,000
|
|
|
|
25,000,000
|
|
Shares issued and outstanding
|
|
|
8,926,310
|
|
|
|
5,526,561
|
|
Series B
During 2009, the Company issued 8,079,444 shares of
Series B redeemable preferred stock for $0.60 per share,
generating gross proceeds of $4,848,661 and incurring issuance
costs of approximately $28,819.
The holders of Series B preferred stock are entitled to
dividends at a rate of
71/2%
per year. Dividends are due and payable annually and accumulate
if not paid. Dividends are payable in cash or additional shares
of Series B preferred stock at the option of the Company.
Series B preferred stock is senior to Series A
preferred stock in the event of liquidation and dividends.
Series B preferred stock has a liquidation preference equal
to $0.60 per share plus accumulated dividends. Dividends of
$245,208 have accumulated for Series B preferred stock. As
of December 31, 2009, no dividends have been paid or
declared.
Series B preferred stock is convertible into one share of
common stock, subject to adjustment for certain anti-dilution
provisions, at a conversion price of $0.60 per share. Conversion
is at the option of the stockholders and is mandatory with the
approval of the majority of the stockholders if the Company
consummates a public offering at a designated price and from
which the Company receives proceeds of at least $25,000,000. If
the Company receives the minimum proceeds, the conversion
becomes mandatory. The Series B stockholders have voting
rights equal to common stockholders.
Series A-3
In February 2008, the Company issued 3,712,871 shares of
Series A-3
redeemable preferred stock for $0.40 per share, generating gross
proceeds of $1,500,000 and incurring issuance costs of $31,146.
F-109
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
In June 2007, the Company issued convertible promissory notes to
certain investors prior to the
Series A-3
convertible preferred stock offering. The notes accrued interest
at 10%. The convertible promissory notes, totaling $250,000, and
accrued interest of $16,781 were converted into
660,349 shares of
Series A-3
preferred stock in February 2008.
In June 2007, the Company issued 1,856,436 shares of
Series A-3
redeemable preferred stock for $0.40 per share, generating gross
proceeds of $750,000 and incurring issuance costs of $14,198.
In March 2006, the Company issued 5,965,347 shares of
Series A-3
redeemable preferred stock for $0.40 per share, generating gross
proceeds of $2,410,000 and incurring issuance costs of $39,868.
The holders of
Series A-3
preferred stock are entitled to dividends at a rate of
71/2%
per year. Dividends are due and payable annually and accumulate
if not paid. Dividends are payable in cash, additional shares of
Series A-3
or
Series A-2
preferred stock, or a combination of both. As of
December 31, 2009 and 2008, $1,071,446 and $701,938 of
undeclared dividends have accumulated for
Series A-3
preferred stock. As of December 31, 2009 and 2008, no
dividends have been paid or declared.
Series A-2
The holders of
Series A-2
preferred stock are entitled to dividends at a rate of
71/2%
per year. Dividends are due and payable annually and accumulate
if not paid. Dividends are payable in cash, additional shares of
Series A-3
or
Series A-2
preferred stock, or a combination of both. As of
December 31, 2009 and 2008, $129,588 and $95,088 of
undeclared dividends have accumulated for
Series A-2
preferred stock. As of December 31, 2009 and 2008, no
dividends have been paid or declared.
The Company issued convertible promissory notes to certain
stockholders prior to the
Series A-2
convertible preferred stock offering. The convertible promissory
notes, totaling $460,000 were converted into
1,138,615 shares of
Series A-2
preferred stock.
Series A-1
The holders of
Series A-1
preferred stock are entitled to dividends at a rate of
71/2%
per year. Dividends are due and payable annually and accumulate
if not paid. Dividends are payable in cash, additional shares of
Series A-3
or
Series A-2
preferred stock, or a combination of both. As of
December 31, 2009 and 2008, $44,552 and $32,691 of
undeclared dividends have accumulated for
Series A-1
preferred stock. As of December 31, 2009 and 2008, no
dividends have been paid or declared.
The Company issued a convertible promissory note to a certain
stockholder prior to the
Series A-1
convertible preferred stock offering. The convertible promissory
note, totaling $150,000, and accrued interest of $8,146 was
converted into 391,450 shares of
Series A-1
preferred stock and 74,257 shares of common stock.
Each share of
Series A-3,
A-2 and
A-1
(Series A) preferred stock is convertible into one
share of common stock, subject to adjustment in certain
circumstances at a conversion price of $0.40 per share. Each
share of Series A preferred stock has a liquidation
preference equal to $0.40 per share plus accumulated dividends.
Conversion is at the option of the stockholders and is mandatory
with the approval of the majority of the stockholders if the
Company consummates a public offering at a designated price and
from which the Company receives proceeds of at least
$25,000,000. If the Company receives the minimum proceeds, the
conversion becomes mandatory. The
Series A-3
stockholders have voting rights equal to common stockholders.
Series A-3
preferred stock is senior to
Series A-2
and A-1
preferred stock and common stock.
Series A-2
preferred stock is senior to
Series A-1
preferred stock and common stock.
F-110
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
Common
Stock
In August 2003, the Company issued 5,000,000 shares of
restricted common stock to two employees for services rendered.
The restricted shares are fully vested as of December 31,
2006. Compensation expense of $64,189 was recorded during 2003
for the issuance of the restricted shares of common stock.
In December 2003, the Company issued a warrant to purchase
common stock. The warrant had no fair value at the date of the
grant. The holder of the warrant may purchase up to
40,000 shares of common stock at an exercise price of $0.25
per share. The holder of the warrant may also convert the
warrant into common stock based on the fair value of the common
stock on the date of conversion as determined by the Board of
Directors. The warrant expires at the earlier of seven years
from the date of issuance, the date the Company consummates a
public offering, or the sale of the Company.
As a result of the pending sale of the Company, the Company
issued 116,026 shares of restricted common stock to two
employees for services rendered in which compensation was not
awarded. The restricted shares do not vest and compensation is
not recognized until the Company has recognized profits for at
least two consecutive quarters, upon acquisition of the
Companys stock by a third party, or in the consummation of
a public offering.
Note 8
Stock Option Plan
The Company has a stock option plan whereby the Company may
grant incentive stock options to employees, directors,
consultants, and advisors to purchase shares of the
Companys common stock. The Company has authorized
4,398,564 shares to be issued under the plan. Incentive
stock options may be granted at an exercise price of not less
than 100% of the estimated fair value of the stock at the date
of the grant as determined by the Board of Directors of the
Company and vest over a
4-year
period. Options are exercisable under specified conditions for
up to 10 years from the date of grant. If incentive stock
options are granted to a stockholder who owns more than 10% of
the voting power of all classes of stock of the Company, the
exercise price of the incentive stock options must be at least
110% of the estimated fair value of the common stock at the date
of the grant and its term cannot exceed 5 years.
Stock option activity for 2009 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Balance at January 1, 2009
|
|
|
1,955,223
|
|
|
$
|
.28
|
|
Granted
|
|
|
1,385,500
|
|
|
|
.17
|
|
Forfeited
|
|
|
(57,000
|
)
|
|
|
.30
|
|
Cancellation of stock option plan
|
|
|
(3,283,723
|
)
|
|
|
.20
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation for options granted is recognized over the
service period, which approximates the vesting period.
Compensation expense was $98,356 at December 31, 2009 and
$93,258 at December 31, 2008. The weighted-average grant
date fair value of options granted was $0.08 per share in 2009
and $0.13 per share in 2008.
Effective April 1, 2009, the Board of Directors re-priced
all of the options granted to the Companys employees
concurrent with the re-pricing of the Companys common
stock, both at $0.17. This re-pricing covered vested, partially
vested and non-vested stock options. There was no incremental
compensation expense recognized as a result of this repricing.
Subsequent to the re-pricing, the Company entered into
negotiations with Trustwave
F-111
BITARMOR
SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL
STATEMENTS (Continued)
Holdings, Inc. (Trustwave) to purchase the Company
(Note 11). As a result of the pending sale transaction, the
Company cancelled the existing stock option plan and, therefore,
there are no options outstanding at December 31, 2009.
Concurrent with the cancellation of the plan, employees were
issued shares of the Companys common stock based upon a
prescribed formula in lieu of their cancelled options. As a
result of the cancellation of the stock options and subsequent
issuance of common stock, the Company recognized approximately
$3,400 in compensation expense.
Note 9
Operating Lease Commitments
The Companys office space is leased under an operating
lease agreement that expires on September 30, 2011. The
lease agreement contains an early termination clause that
permits the Company to terminate the lease as of June 30,
2009 or 2010. If the Company terminates the lease under this
clause, the obligation for the remaining minimum future rental
commitments under the agreement will be eliminated. Rent expense
totaled approximately $134,000 for 2009 and $106,000 for 2008.
Following are the minimum future rental commitments under the
current lease obligations:
|
|
|
|
|
Year Ending
|
|
|
|
December 31
|
|
Amount
|
|
|
2010
|
|
$
|
116,000
|
|
2011
|
|
|
95,000
|
|
|
|
|
|
|
|
|
$
|
211,000
|
|
|
|
|
|
|
Note 10
Commitments
The Company had a research agreement with The Technology
Collaborative (TTC), that expired on June 30, 2006, to
develop certain limited software technology. The Company
maintains ownership of the intellectual property, deliverables,
and all other technology developed by the Company under the
agreement. Upon payment of a fee by TTC to the Company, the
Company granted a perpetual, irrevocable, nonexclusive license
to TTC for the use of certain limited technology, with certain
rights. TTC has the right to sublicense the technology, and an
applicable royalty would be due to the Company. Conversely, the
Company may also be required to pay TTC a royalty based on the
gross amounts received by the Company from the licensing or
other transfer of certain limited technology to third parties.
The maximum amount payable by the Company is limited to no more
than twice the fee paid by TTC to the Company. The total fee
paid by TTC to the Company was $158,555. There were no amounts
payable by the Company to TTC in 2009 or 2008 and no amounts
were receivable by the Company from TTC in 2009 or 2008.
The employment of an employee terminated effective
January 10, 2008. The Company entered into a Confidential
Separation Agreement (the Agreement) with the employee which
required the Company to compensate the former employee $63,000
through May 2008. The agreement also provided the former
employee the ability to exercise their vested stock options for
a two-year period following the date of termination. Effective
December 31, 2009, the employees stock options were
cancelled and were replaced with shares of the Companys
common stock.
Note 11
Subsequent Events
Effective January 6, 2010, the Company entered into an
asset purchase agreement with Trustwave whereby Trustwave
acquired certain of the assets of the Company and assumed
certain liabilities in exchange for Class A voting common
stock in Trustwave. These financial statements do not contain
any adjustments as a result of this transaction.
F-112
INDEPENDENT
AUDITORS REPORT
Board of Directors
Vericept Corporation
Waltham, Massachusetts
We have audited the accompanying balance sheets of Vericept
Corporation (the Company) as of August 25, 2009
and December 31, 2008, and the related statements of
operations, changes in stockholders deficit and cash flows
for the period and year then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Vericept Corporation as of August 25, 2009 and
December 31, 2008, and the results of its operations and
its cash flows for the period and year then ended in conformity
with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the
Company merged with and into Trustwave Acquisition, Inc. under
the name of TW Vericept Corporation. These financial statements
do not include any adjustments that might result from the merger.
/s/ Ehrhardt Keefe Steiner & Hottman PC
March 1, 2010
Denver, Colorado
F-113
VERICEPT
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
59,034
|
|
|
$
|
407,072
|
|
Accounts receivable, net of allowance for doubtful accounts of
$5,000 (2009) and $28,216 (2008)
|
|
|
759,422
|
|
|
|
1,681,840
|
|
Prepaid expenses
|
|
|
475,052
|
|
|
|
562,152
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,293,508
|
|
|
|
2,651,064
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Property, equipment, and licensed software, net
|
|
|
328,017
|
|
|
|
841,128
|
|
Intangible and other assets, net of accumulated amortization of
$134,723 (2009) and $121,120 (2008)
|
|
|
21,283
|
|
|
|
34,886
|
|
Long-term prepaid expenses and other
|
|
|
137,087
|
|
|
|
91,305
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
486,387
|
|
|
|
967,319
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,779,895
|
|
|
$
|
3,618,383
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
291,724
|
|
|
$
|
605,180
|
|
Accounts payable related party
|
|
|
3,190
|
|
|
|
107,407
|
|
Accrued expenses and other
|
|
|
2,976,912
|
|
|
|
1,361,394
|
|
Deferred revenue
|
|
|
3,951,877
|
|
|
|
6,098,476
|
|
Current portion of long-term debt, net of unamortized discount
of $69,673 (2009) and $3,903,748 (2008)
|
|
|
9,805,319
|
|
|
|
4,536,987
|
|
Bridge note derivative liability
|
|
|
|
|
|
|
49,396,203
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,029,022
|
|
|
|
62,105,647
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
74,759
|
|
|
|
60,443
|
|
Deferred revenue, net of current portion
|
|
|
5,163,926
|
|
|
|
5,316,971
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
5,238,685
|
|
|
|
5,377,414
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,267,707
|
|
|
|
67,483,061
|
|
|
|
|
|
|
|
|
|
|
Series B-1
redeemable convertible preferred stock; $0.001 par value.
Authorized 60,857,203 shares; issued and outstanding
54,727,242 shares; estimated liquidation preference of
$40,200,000 at August 25, 2009 and December 31, 2008
|
|
|
13,264,080
|
|
|
|
13,264,080
|
|
Series A-1
redeemable preferred stock; $0.001 par value. Authorized,
issued, and outstanding 9,086,548 shares; estimated
liquidation preference of $10,900,000 at August 25, 2009
and December 31, 2008
|
|
|
10,903,887
|
|
|
|
10,903,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,167,967
|
|
|
|
24,167,967
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders deficit
|
|
|
|
|
|
|
|
|
Series A redeemable preferred stock; $0.001 par value.
Authorized, issued, and outstanding 158,500 shares;
estimated liquidation preference of $1,585,000 at
August 25, 2009 and December 31, 2008
|
|
|
787,500
|
|
|
|
787,500
|
|
Common stock; $0.001 par value. Authorized
165,000,000 shares; issued and outstanding
62,471,268 shares
|
|
|
62,471
|
|
|
|
62,471
|
|
Additional paid-in capital
|
|
|
49,679,337
|
|
|
|
49,607,688
|
|
Accumulated deficit
|
|
|
(95,185,087
|
)
|
|
|
(138,490,304
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(44,655,779
|
)
|
|
|
(88,032,645
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
1,779,895
|
|
|
$
|
3,618,383
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-114
VERICEPT
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Period Ended
|
|
|
December 31,
|
|
|
|
August 25, 2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
5,456,746
|
|
|
$
|
11,176,398
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Direct costs of revenues
|
|
|
332,563
|
|
|
|
1,017,780
|
|
Research and development
|
|
|
2,495,751
|
|
|
|
6,838,278
|
|
Sales and marketing
|
|
|
2,915,048
|
|
|
|
9,975,901
|
|
General and administrative
|
|
|
1,555,426
|
|
|
|
1,983,750
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,298,788
|
|
|
|
19,815,709
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,842,042
|
)
|
|
|
(8,639,311
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
35,074
|
|
Interest expense
|
|
|
(6,074,682
|
)
|
|
|
(3,839,850
|
)
|
Gain (loss) on bridge loan embedded derivative
|
|
|
51,221,791
|
|
|
|
(42,217,411
|
)
|
Other
|
|
|
150
|
|
|
|
(1,515
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
45,147,259
|
|
|
|
(46,023,702
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
43,305,217
|
|
|
$
|
(54,663,013
|
)
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-115
VERICEPT
CORPORATION
For the
Period Ended August 25, 2009 and Year Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Redeemable
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
(Deficit)
|
|
|
Balance December 31, 2007
|
|
|
158,500
|
|
|
$
|
787,500
|
|
|
|
62,449,634
|
|
|
$
|
62,450
|
|
|
$
|
49,482,409
|
|
|
$
|
(83,827,291
|
)
|
|
$
|
(33,494,932
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
21,634
|
|
|
|
21
|
|
|
|
2,927
|
|
|
|
|
|
|
|
2,948
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,352
|
|
|
|
|
|
|
|
122,352
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,663,013
|
)
|
|
|
(54,663,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
158,500
|
|
|
|
787,500
|
|
|
|
62,471,268
|
|
|
|
62,471
|
|
|
|
49,607,688
|
|
|
|
(138,490,304
|
)
|
|
|
(88,032,645
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,649
|
|
|
|
|
|
|
|
71,649
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,305,217
|
|
|
|
43,305,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 25, 2009
|
|
|
158,500
|
|
|
$
|
787,500
|
|
|
|
62,471,268
|
|
|
$
|
62,471
|
|
|
$
|
49,679,337
|
|
|
$
|
(95,185,087
|
)
|
|
$
|
(44,655,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-116
VERICEPT
CORPORATION
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
|
Year Ended
|
|
|
|
August 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
43,305,217
|
|
|
$
|
(54,663,013
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used by
operating activities
|
|
|
|
|
|
|
|
|
Non-cash interest
|
|
|
5,680,376
|
|
|
|
3,352,214
|
|
Stock-based compensation
|
|
|
71,649
|
|
|
|
122,352
|
|
Change in fair value of warrant liability
|
|
|
|
|
|
|
|
|
(Gain) loss on bridge loan derivative liability
|
|
|
(51,221,791
|
)
|
|
|
42,217,411
|
|
Loss (gain) on disposal of assets
|
|
|
1,808
|
|
|
|
(4,138
|
)
|
Depreciation and amortization
|
|
|
531,204
|
|
|
|
1,001,685
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
922,418
|
|
|
|
1,329,008
|
|
Prepaid expenses and other
|
|
|
34,921
|
|
|
|
425,666
|
|
Accounts payable
|
|
|
(313,456
|
)
|
|
|
(1,361,312
|
)
|
Accounts payable related party
|
|
|
(104,217
|
)
|
|
|
5,004
|
|
Accrued expenses and other
|
|
|
1,615,518
|
|
|
|
(505,363
|
)
|
Deferred revenue
|
|
|
(2,299,644
|
)
|
|
|
(2,562,116
|
)
|
Royalty obligation
|
|
|
|
|
|
|
(800,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,081,214
|
)
|
|
|
43,220,411
|
|
|
|
|
|
|
|
|
|
|
Net cash used by operating activities
|
|
|
(1,775,997
|
)
|
|
|
(11,442,602
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and software
|
|
|
(6,298
|
)
|
|
|
(191,295
|
)
|
Proceeds from sales of property, equipment, software
|
|
|
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(6,298
|
)
|
|
|
(182,295
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(391,327
|
)
|
|
|
(1,956,563
|
)
|
Proceeds from notes payable
|
|
|
1,825,584
|
|
|
|
7,178,791
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
2,948
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,434,257
|
|
|
|
5,225,176
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(348,038
|
)
|
|
|
(6,399,721
|
)
|
Cash and cash equivalents beginning of year
|
|
|
407,072
|
|
|
|
6,806,793
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
59,034
|
|
|
$
|
407,072
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
Cash paid for interest for the period ended August 25, 2009
and year ended December 31, 2008 was $41,634 and $286,483,
respectively.
Supplemental disclosure of non-cash investing and financing
activities:
During 2008, the Company issued Series Preferred B-1
warrants in connection with the issuance of bridge loans and
recorded the fair value of $60,443 as a warrant liability and
debt discount. In addition, the Company recorded an embedded
derivative liability related to the bridge loans of $44,883,518
and $7,178,791 was recorded as a debt discount.
During 2009, the Company issued Series Preferred B-1
warrants valued at $15,159 in connection with the issuance of
bridge loans and recorded as a warrant liability and debt
discount. In addition, the Company recorded an additional
embedded derivative liability related to the bridge loans of
$14,782,540 and $1,825,588 was recorded as a debt discount.
See notes to financial statements.
F-117
VERICEPT
CORPORATION
Note 1
Description of Business and Summary of Significant Accounting
Policies
Vericept Corporation (the Company), a Delaware
corporation, was formed in June 1999 and develops, manufactures,
supports, and markets enterprise software for data loss
prevention applications. The software performs content analysis
on network traffic, including
e-mail and
attached documents, webmail,
peer-to-peer
traffic, file transfer protocol, telnet and instant messaging,
provides reports, and prevents the leakage of sensitive data due
to inadvertent or malicious actions by trusted insiders
(employees). The Companys products are
marketed primarily to assist in providing automation and
efficiencies in regulatory compliance controls, defense of
intellectual property and other sensitive documents, and
monitoring and enforcement of adherence to appropriate use
policies. The products are sold primarily in the United States
through both direct sales and resellers and distribution
partners. The Company is privately-held and based in Denver,
Colorado, and Waltham, Massachusetts. In August 2009, the
Company was acquired by Trustwave Holding Inc. as discussed in
Note 2.
The Company is subject to various risks and uncertainties
frequently encountered by companies in the new and rapidly
evolving market for technology-based products and services. Such
risks and uncertainties include, but are not limited to, its
limited operating history, operating losses, competition,
changing marketplace demands, an evolving business model, and
dependence on key personnel. To address these risks, the Company
must, among other things, develop its customer base, implement
and successfully execute its business and marketing strategies,
continue to develop and upgrade its technology, provide superior
customer service, provide for sufficient funding, and attract,
retain, and motivate qualified personnel. There can be no
guarantee that the Company will be successful in addressing
these or other such risks.
Use
of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
The most significant estimates relate to revenue recognition,
the estimated fair values of equity securities, the valuation of
the embedded derivative liability, the allowance for doubtful
accounts and estimated lives used for depreciation and
amortization purposes. The Company has recorded transactions
that include the issuance of warrants, options and stock of the
Company based upon fair values of the Companys equity
securities that were estimated by management and the Board of
Directors. The Company believes these estimates of fair value
are reasonable.
Cash
and Cash Equivalents
The Company considers all highly liquid instruments purchased
with an original maturity of three months or less to be cash
equivalents. The Company continually monitors its positions
with, and the credit quality of, the financial institutions with
which it invests. At December 31, 2008, cash and cash
equivalents exceeded the federally insured limit by
approximately $300,000 with none in excess at August 25,
2009.
Concentrations
of Credit Risk and Product Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of accounts
receivable, cash and cash equivalents. The Company performs
initial and ongoing credit evaluations of its customers
financial condition and generally requires no collateral. As of
August 25, 2009, the Companys accounts receivable
balances from customers in excess of 10% of the net trade
accounts receivable balance consisted of four customers with
balances totaling approximately $200,000. As of
December 31, 2008, the
F-118
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Companys accounts receivable balances from customers in
excess of 10% of the net trade accounts receivable balance
consisted of three customers with balances of approximately
$830,000.
The Companys cash equivalents are invested in money market
securities with financial institutions that management believes
are creditworthy. Such deposit accounts at times may exceed
federally insured limits. The Company has not experienced losses
in such accounts.
Accounts
Receivable
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is the
Companys best estimate of the amount of probable credit
losses in the Companys existing accounts receivable based
on historical experience. The Company reviews its allowance for
doubtful accounts periodically, with a focus on past due
balances and balances over a specified amount. Account balances
are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote.
Intangible
Assets
Included in intangible and other assets are costs associated
with patents and trademarks, which are amortized over their
estimated economic lives of five years. At August 25, 2009
and December 31, 2008, the Company had total intangible
assets of approximately $156,000. Amortization expense was
$13,603 and $25,252 for the periods ended August 25, 2009
and December 31, 2008, respectively. Future expected
amortization is $10,258 in 2010; $6,915 in 2011; and $4,110 in
2012.
Impairment
of Long-Lived Assets
The Company reviews its long-lived assets for impairment at
least annually or whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recovered. The Company looks primarily to the estimated
undiscounted future cash flows in its assessment of whether or
not long-lived assets have been impaired. The Company determined
that no impairment expense was necessary for the periods ended
August 25, 2009 and December 31, 2008.
Stock-Based
Compensation
The Company recognizes compensation expense over the vesting
term for share-based payments based on the estimated fair value
of the awards. Tax benefits relating to the deductibility of
increases in the value of equity instruments issued under
share-based compensation arrangements that are not included in
costs applicable to sales (excess tax benefits) are
presented as financing cash inflows in the statements of cash
flows.
Revenue
Recognition
The Company primarily sells software, post contract support
(PCS), professional services and hardware. Software
is sold under perpetual and term license agreements. Term
licenses often cover multi-year periods which generally require
customers to make payment 30 days from the time the
contract is executed. PCS is generally sold as a separate
element in perpetual software license agreements and is combined
with the license fee for term software license agreements.
Perpetual licenses can include PCS commitments covering
multi-year periods which generally require customers to make
payment 30 days from the time the contract is executed.
Professional services include training and consulting services
which do not involve significant production, customization or
modification of the Companys software. Hardware is
generally sold to customers requiring a preloaded appliance
solution of the Companys software.
The Companys software is generally sold as part of a
multiple element arrangement that includes PCS and can also
include professional services
and/or
hardware. Revenue from software arrangements involving multiple
elements may be allocated to each element and separately
recognized only if there is vendor specific objective
F-119
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
evidence (VSOE) of the fair value of the elements.
Assuming all other revenue recognition criteria are met, the
Company may use the residual method of revenue recognition for
all multiple element arrangements. Under the residual method,
revenue is allocated to the undelivered elements based on the
VSOE of such elements and the difference between the total
arrangement fee and the VSOE of the undelivered elements is
recognized as revenue. VSOE is determined using the price
charged in multiple transactions for the individual elements of
the multiple element arrangement when the element is sold
separately. If sufficient evidence of VSOE cannot be determined
for any of the undelivered elements, all revenue for the
arrangement is deferred until VSOE can be established or until
all elements of the arrangement have been delivered. In the
cases where the only remaining undelivered element is PCS for
which VSOE cannot be established, the entire arrangement fee is
recognized as revenue ratably over the remaining contracted PCS
term.
Undelivered elements of multiple element arrangements typically
include professional services and PCS. The Company was unable to
maintain VSOE, and, therefore, has not established VSOE for any
elements in multiple deliverable arrangements. As such, revenue
from sales of the Companys products, which includes
hardware, software, and services and maintenance, as well as
renewals of annual maintenance agreements, are deferred until
the only undelivered element is PCS and then recognized ratably
over the remaining terms of the agreements, which are typically
one to three years.
All costs associated with licensing of software products,
support, updates, and other services are expensed as incurred.
Direct
Cost of Revenue
Direct cost of revenue primarily consists of royalty expenses
related to third-party software that is embedded into the
Companys software products as well as certain hardware and
software costs.
Research
and Development Costs
Research and development costs are charged to expense as
incurred and consist of salaries and other direct costs. The
Company capitalizes certain software development costs
subsequent to the establishment of technological feasibility.
The Companys software is deemed to be technologically
feasible at the point a working model of the software product is
developed, which is generally at or near the point the Company
commences field testing of the software. Through August 25,
2009, for products developed by the Company, the period from
attainment of technological feasibility through the date of
general release has been brief and qualifying costs were not
material, and, accordingly, the Company has not capitalized any
qualifying software development costs in the accompanying
financial statements.
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
expense for the periods ended August 25, 2009 and
December 31, 2008 was $0 and $14,000, respectively.
Income
Taxes
A current provision for income taxes represents actual or
estimated amounts payable on tax return filings each period.
Deferred income tax assets and liabilities are recorded for the
estimated future tax effects of temporary differences between
the tax basis of assets and liabilities and amounts reported in
the accompanying balance sheets, and for operating loss and tax
credit carryforwards. A change in deferred tax assets and
liabilities for the period measures the deferred tax provision
or benefit for the period. Effects of changes in enacted tax
laws on deferred tax assets and liabilities are reflected as
adjustments to the tax provision or benefit in the period of
enactment. The Companys net deferred tax asset has been
completely reduced by a valuation allowance as management does
not believe the realization of the deferred tax asset is more
likely than not at the balance sheet date (Note 6).
F-120
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Fair
Value of Financial Instruments
The Companys financial instruments consist of cash and
cash equivalents, accounts receivable, accounts payable, bridge
note derivative liability, warrant liability, and debt. The
carrying value of cash and cash equivalents, accounts
receivable, and accounts payable are considered to be
representative of their fair value due to the short maturity of
these instruments. The book value of the Companys bridge
note debt approximates its fair value as the interest rate
approximates the Companys credit adjusted cost of
borrowing. The fair values of the Companys bridge note
derivative liability and warrant liability is discussed in
Note 4.
Accounting standards establish a hierarchy which prioritizes the
inputs to valuation techniques used to measure fair value into
three levels. The fair value hierarchy gives the highest
priority to quoted market prices (unadjusted) in active markets
for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3).
Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or
liability, either directly or indirectly.
Accounting standards require financial assets and liabilities to
be classified based on the lowest level of input that is
significant to the fair value measurement. The Companys
assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the valuation
of the fair value of assets and liabilities and their placement
within the fair value hierarchy levels.
The following assets are measured at fair value as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 25, 2009
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Bridge note derivative liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Warrant liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
74,759
|
|
|
$
|
74,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Bridge note derivative liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
49,396,203
|
|
|
$
|
49,396,203
|
|
Warrant liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,443
|
|
|
$
|
60,443
|
|
The Companys estimate of the bridge note derivative and
warrant liability is discussed in Note 4.
F-121
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Level 3
Changes
The following is a reconciliation of the beginning and ending
balances for assets measured at fair value using significant
unobservable inputs (Level 3) during the period ended
August 25, 2009 and year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge Note
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
|
Warrant
|
|
|
|
|
|
|
Liability
|
|
|
Liability
|
|
|
Total
|
|
|
December 31, 2007
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Bridge note liability
|
|
|
44,883,518
|
|
|
|
|
|
|
|
44,883,518
|
|
Warrants issued
|
|
|
|
|
|
|
60,443
|
|
|
|
60,443
|
|
Change in value
|
|
|
4,512,685
|
|
|
|
|
|
|
|
4,512,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
49,396,203
|
|
|
|
60,443
|
|
|
|
49,456,646
|
|
Additional bridge note liability
|
|
|
1,825,588
|
|
|
|
|
|
|
|
1,825,588
|
|
Additional warrants issued
|
|
|
|
|
|
|
15,159
|
|
|
|
15,159
|
|
Change in value
|
|
|
(51,221,791
|
)
|
|
|
(843
|
)
|
|
|
(51,222,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 25, 2009
|
|
$
|
|
|
|
$
|
74,759
|
|
|
$
|
74,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent
Events
The Company has evaluated all subsequent events through
March 1, 2010, which is the date the financial statements
were made available for use.
Note 2
Sale of Company
On August 26, 2009, the Company was merged into Trustwave
Acquisition, Inc., a subsidiary of Trustwave Holdings, Inc.
(Acquiring Company). In connection with the merger,
the Companys Bridge Notes and all related obligations
there under were canceled and exchanged for
4,000,000 shares of Class A Voting Common Stock of
Trustwave Holding Inc. plus an additional adjustment as defined
in the agreement. At the effective date of the merger, all
shares of the Vericept company stock issued and outstanding,
stock options and warrants were canceled.
The final consideration paid is subject to a working capital
adjustment based on the closing balance sheet of the Company.
Any proceeds from the sale as the result of the working capital
adjustment will be distributed to the stockholders based on the
preferences described in Notes 4 and 5.
The Company incurred transaction costs for investment banker and
legal fees of approximately $1,300,000. These costs were
expensed as incurred.
The financial statements do not reflect the financial position
of the Company subsequent to the acquisition date.
Note 3
Property, Equipment, and Licensed Software
Property, equipment, and licensed software are recorded at cost.
Depreciation and amortization are computed using the
straight-line method based on estimated useful lives ranging
from three to five years. Leasehold improvements are amortized
over the service lives of the improvements or the term of the
lease, whichever is shorter. Routine maintenance is expensed as
incurred; betterments are capitalized.
F-122
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Property, equipment, and licensed software consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Computer equipment
|
|
$
|
3,329,745
|
|
|
$
|
3,329,745
|
|
Software
|
|
|
1,301,886
|
|
|
|
1,295,587
|
|
Leasehold improvements
|
|
|
448,169
|
|
|
|
456,306
|
|
Office equipment
|
|
|
578,655
|
|
|
|
578,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,658,455
|
|
|
|
5,660,293
|
|
Less accumulated depreciation and amortization
|
|
|
(5,330,438
|
)
|
|
|
(4,819,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
328,017
|
|
|
$
|
841,128
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the period ended
August 25, 2009 and year ended December 31, 2008 was
$517,601 and $976,433, respectively. All office equipment,
computer equipment, software, and furniture are pledged as
collateral for borrowings under the bank loan facility.
Note 4
Notes Payable
In 2006, the Company entered into a Growth Capital
line-of-credit
facility for $5,000,000 that was to mature June 1, 2009 and
is collateralized by certain assets of the Company. The
$5,000,000 was to be repaid over 30 months beginning
January 1, 2007. The interest rate on the Growth Capital
line is 9.5% plus an additional payment equal to 3.728% of the
amount advanced due at the end of the term. The Company is
accruing these obligations at 13.23% over the term of the
agreement. In connection with securing this facility, the
Company issued warrants to the bank to purchase
537,500 shares of Series D redeemable convertible
preferred stock with an exercise price of $1.20 per share. The
warrants had an estimated fair value of $333,430 upon issuance
determined using the Black-Scholes option pricing model with the
following assumptions: expected dividend yield of 0%,
approximate risk-free rate of 4.77%, volatility of 42%, a
contractual life of seven years, and an exercise price of $1.20
per share. The fair value of the warrants was recorded as a debt
discount that is amortized as additional interest expense over
the term of the facility. In 2007, these warrants were exchanged
for 537,500 warrants to purchase common stock in connection with
a recapitalization and classified as a liability at
January 1, 2009 in accordance with the applicable
authoritative literature. The incremental fair value at the
exchange date and through August 25, 2009 was not
significant. Borrowings under the facility are collateralized by
all assets of the Company, including intellectual property.
In 2009, the agreement was amended to reduce the monthly
payments for February 2009 through April 2009 to $20,000 per
month, with payments in May 2009 of $186,955 and in June 2009 of
$878,320, representing the amount of these reductions.
Subsequent to April 2009, the lenders suspended payments on the
facility. A portion of the facility representing the interest of
one of the lenders in the amount of $175,905 was repaid in
August 2009. The remaining balance was satisfied after the
acquisition with stock of the Acquiring Company. At
August 25, 2009 and December 31, 2008, $870,617 and
$1,261,944 was outstanding and current, respectively.
In May 2008 and June 2008, the Company issued subordinated
secured convertible promissory notes and warrants for $800,297
and $850,620, respectively. Also in June 2008, the Company
entered into an agreement, as amended, to issue up to $8,051,713
of subordinated secured convertible promissory notes and
warrants through July 2009. Notes issued under this agreement
were $1,825,584 and $5,527,874 in 2009 and 2008, respectively.
The notes under the May 2008 and both June 2008 agreements
(collectively, the Bridge Notes) have a stated
interest rate of 7% per annum. The notes are secured by all
assets of the Company. The Bridge Notes are convertible, based
on subsequent financing events, into either shares of a
qualified subsequent financing or shares of
Series B-1
redeemable convertible preferred stock. Outstanding amounts
under these agreements at August 25, 2009 and
December 31, 2008 totaled $9,004,375 and $7,178,791,
respectively.
F-123
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
In connection with the issuance of the Bridge Notes, the Company
issued warrants exercisable for 9,199,407 shares of
Series B-1
Redeemable Convertible Preferred Stock
(Series B-1)
at a price of $.01 per share. The warrants are exercisable for
ten years. The warrants had an estimated fair value of $75,602
upon issuance determined using the Black-Scholes option pricing
model with the following assumptions: expected dividend yield of
0%, approximate risk-free rate of 2.15% and 3.15% for 2009 and
2008 issuances, respectively, volatility of 80%, a contractual
life of ten years, and a strike price of $0.01 per share. The
fair value of the warrants was recorded as a debt discount and
was fully amortized as additional interest expense through the
July 2009 maturity date.
Also in connection with the terms of the Bridge Note agreements,
the Company recorded an embedded derivative liability associated
with the contingent mandatory payment as defined and amended in
the Bridge Note agreements. The mandatory payment required the
Company to pay nine times the Bridge Note outstanding balance in
the event of a Corporate Transaction, as defined in the
agreement, and further defined in the Articles of Incorporation
as a liquidation event.
During 2008, the Company recorded an embedded derivative
liability of $44,883,518 and a debt discount equal to the amount
of the outstanding debt of $7,178,791 resulting in a loss on the
embedded derivative. The Company determined the fair value of
the embedded derivative using a probability weighted model.
Management estimated that the probability of a mandatory payment
was approximately 75% probability of default due to diminishing
cash flows and bookings and 10% due to a private sale, both
events representing a Corporate Transaction as discussed
earlier. The Company then discounted the liability through the
estimated potential trigger dates using an internally estimated
discount rate of 17%. At December 31, 2008, the Company
adjusted the embedded derivative liability to the estimated fair
value at the balance sheet date and amortized the debt discount.
During 2009, the Company recorded an embedded derivative
liability of $14,782,540 and debt discount equal to the amount
of additional debt of $1,825,588 resulting in an additional loss
on the embedded derivative. During 2009, the Company calculated
the probability of a mandatory payment assuming a 75%
probability of default and a 20% probability of a private sale
using the discount rate of 17% and adjusted the embedded
derivative liability, the debt discount and the loss on the
embedded derivative accordingly.
At August 25, 2009, the Company evaluated the liability and
determined that the probability of a Corporate Transaction was
reasonably assured given the proposed sale of the Company as
described in Note 2 and the Companys default under
the Bridge Notes. However, the probability that the mandatory
payment would be waived at the acquisition date was also
reasonably assured given the negotiations with the noteholders
in connection with the proposed acquisition. Therefore, the
Company reduced the embedded derivative liability to a deminimis
amount accordingly. Upon execution of the acquisition agreement,
the mandatory prepayment was canceled.
Note 5
Stockholders Agreements
The Company is authorized to issue 165,000,000 shares of
common stock. The Company is also authorized to issue
83,430,578 shares of preferred stock, of which
158,500 shares are designated Series A Redeemable
Preferred Stock (Series A),
9,086,548 shares are designated
Series A-1
Redeemable Preferred Stock
(Series A-1),
60,857,203 shares are designated
Series B-1,
and 13,328,327 shares are designated as
Series B-2
Preferred Stock
(Series B-2).
The rights, preferences, privileges, and restrictions of the
Companys capital stock are set forth in the Companys
Restated Certificate of Incorporation, as amended from time to
time. All shares of common stock and preferred stock have a par
value of $0.001 per share.
Series A
Preferred Stock
Between January 2000 and June 2000, the Company completed an
offering of units, which consisted of one share of
common stock and one share of Series A. Pursuant to such
offering the Company sold 158,500 units (i.e.
158,500 shares of common stock and 158,500 shares of
Series A) for $10 per Unit and raised $1,585,000 in
capital. The Series A is not convertible into common stock
and does not have any voting rights, and the holders are
entitled
F-124
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
to receive dividends when and if declared by the Companys
Board of Directors. Upon a Liquidation (as defined below) and
after payment of the full liquidation preference of the
Series B-1,
Series B-2,
and
Series A-1,
the holders of Series A are entitled to be paid an amount
per share equal to $9.999, or a total of $1,585,000, plus all
declared and unpaid dividends per share of Series A held by
them. The Company allocated the $10 unit purchase price
evenly between Series A and common stock. The Company, at
the option of the Board of Directors, may at any time redeem all
or any part of the Series A by paying a redemption price
per share equal to $9.999, or a total of $1,585,000, plus any
declared and unpaid dividends thereon.
Series Preferred
In 2007, the Company raised $8,000,000 in capital through the
sale of 32,693,080 shares of a new class of preferred
stock,
Series B-1.
The terms of this funding called for the creation of two other
new classes of preferred stock,
Series A-1
and
Series B-2.
The
Series B-2
was created to provide a pool for a management equity incentive
plan.
During 2007, the Company issued an additional
22,034,162 shares of
Series B-1
as the result of the conversion of certain bridge notes and
associated accrued interest at a conversion rate of $0.2447 per
share.
During 2007, the Company issued 9,086,548 shares of
Series A-1
as the result of the conversion of certain bridge notes and
associated accrued interest at a conversion rate of $1.20 per
share.
Holders of the
Series B-1,
Series B-2,
and
Series A-1
(collectively, the Series Preferred), in
preference to the holders of any other securities of the
Company, are entitled to receive, when and if declared by the
Companys Board of Directors, cash dividends at the rate of
8% of the applicable original issue price per annum on each
outstanding share of Series Preferred.
Series B-1
dividends are in preference to
Series A-1
dividends and
Series A-1
dividends are in preference to
Series B-2
dividends. Such dividends are noncumulative.
In the event of liquidation, dissolution or winding up of the
Company (a Liquidation), before any distribution or
payment may be made to the holders of common stock or
Series A, the holders of the
Series B-1
are entitled to be paid an amount per share equal to three times
the original issue price plus all declared and unpaid dividends,
if any, for each share of Series Preferred held by them.
After the payment of the full liquidation preference of the
Series B-1,
Series A-1
are entitled to be paid an amount per share equal to the
deemed liquidation price of $1.20 per share plus all
declared and unpaid dividends, if any, for each share of Series
preferred held by them. After the payment of the full
liquidation preference of the
Series A-1,
holders of the holders of the
Series B-2
are entitled to be paid an amount per share equal to two times
the original issue price plus all declared and unpaid dividends,
if any, for each share of Series Preferred held by them.
Following the payment of the liquidation preference, the holders
of Series A, in preference to the holders of common stock,
are entitled to be paid an amount per share equal to $9.999 per
share plus all declared dividends for each share of
Series A held by them. After the payment of the full
liquidation preference of the Series Preferred, the holders
of common stock will be entitled to be paid up to $1,000,000
allocated on a pro rata basis. Remaining proceeds, if any, will
be distributed ratably to the holders of common stock and
Series Preferred on an as-if-converted-to-common-stock
basis. A Liquidation includes (i) the sale, lease or other
disposition of all or substantially all of the assets of the
Company, (ii) the acquisition of the Company by another
entity, or (iii) a change in control.
The holders of a majority of the then outstanding shares of
Series Preferred, voting as a single class on an
as-if-converted to common stock basis, could require the Company
to redeem the Series Preferred in three equal annual
installments beginning on the sixth anniversary of the original
issue date and ending on the date two years from such first
redemption date. The
Series B-1
is redeemable at the original issuance price per share, plus
declared and unpaid dividends, and the
Series A-1
is redeemable at the liquidation price per share, plus declared
and unpaid dividends.
Each holder of Series Preferred is entitled to the number
of votes equal to the number of shares of the Companys
common stock into which such shares of Series Preferred
could be converted.
F-125
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
As discussed in Note 2, the Company entered into a merger
agreement which qualified as a Liquidation. Any proceeds
received as a result of the working capital adjustment discussed
in Note 2 will be paid to Series Preferred as outlined
above.
Warrants
The Companys common stock warrants are classified as
equity, with the exception of 537,500 warrants discussed in
Note 4 which were issued in connection with the line of
credit. The 537,500 common stock warrants and the 9,199,407
Series B-1
warrants are recorded as a liability under the applicable
authoritative guidance and accordingly, the warrants are
recorded at fair value with changes in fair value reflected in
the statements of operations.
The following table presents the activity for warrants
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Series B-1
|
|
|
Total
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Outstanding December 31, 2007
|
|
|
3,810,792
|
|
|
|
|
|
|
|
3,810,792
|
|
Issued
|
|
|
|
|
|
|
7,333,994
|
|
|
|
7,333,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
3,810,792
|
|
|
|
7,333,994
|
|
|
|
11,144,786
|
|
Issued
|
|
|
|
|
|
|
1,865,413
|
|
|
|
1,865,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding August 25, 2009
|
|
|
3,810,792
|
|
|
|
9,199,407
|
|
|
|
13,010,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
In February 2001, the Company adopted a 2001 stock option plan
as amended from time to time (the Plan) under which
the Company is authorized to grant incentive and nonqualified
stock options to acquire up to 12,887,006 shares of the
Companys common stock to employees, directors, and
consultants of the Company. Options granted generally vest over
a period of four years and expire after a maximum of ten years.
At August 25, 2009 and December 31, 2008, shares
available for grant were 6,332,134 and 5,710,642, respectively.
In October 2007, the Company adopted a 2007 stock option plan
(the B-2 Plan) under which the Company is authorized
to grant incentive and nonqualified stock options to acquire up
to 13,328,327 shares of the Companys B-2 Preferred
Stock to employees, directors, and consultants of the Company.
Options granted vest over a period of four years and expire
after a maximum of ten years. At August 25, 2009 and
December 31, 2008, shares available for grant were
3,428,768 and 962,844, respectively.
The fair value of each award is estimated on the date of grant
using the Black-Scholes option-pricing model, which requires the
input of subjective assumptions, including the expected term of
the option award, expected stock price volatility, and expected
dividends. These estimates involve inherent uncertainties and
the application of management judgment. Expected volatilities
used in the valuation model are based on the average volatility
of stock for five publicly traded companies determined to be in
a similar industry as the Company. The risk-free rate for the
expected term of the option is based on the United States
Treasury yield curve in effect at the time of grant. The
valuation model assumes no dividends. The Company applies a 40%
forfeiture rate to the value. For the period ended
August 25, 2009 and the year ended December 31, 2008,
the Company recorded compensation expense associated with stock
options of $71,649 and $122,352, respectively. As of
August 25, 2009, the Company has an estimated $91,579 of
future compensation costs related to the unvested portions of
outstanding stock options.
F-126
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table presents the activity for options
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options
|
|
|
B-2 Preferred Stock Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Outstanding December 31, 2007
|
|
|
9,517,565
|
|
|
$
|
0.187
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
175,000
|
|
|
|
0.070
|
|
|
|
13,328,327
|
|
|
|
0.02447
|
|
Forfeited/canceled
|
|
|
(2,494,567
|
)
|
|
|
0.030
|
|
|
|
(962,844
|
)
|
|
|
0.02447
|
|
Exercised
|
|
|
(21,634
|
)
|
|
|
0.136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
7,176,364
|
|
|
|
0.153
|
|
|
|
12,365,483
|
|
|
|
0.02447
|
|
Forfeited/canceled
|
|
|
(621,492
|
)
|
|
|
0.195
|
|
|
|
(2,465,924
|
)
|
|
|
0.02447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding August 25, 2009
|
|
|
6,554,872
|
|
|
$
|
0.149
|
|
|
|
9,899,559
|
|
|
$
|
0.02447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the composition of common stock
options outstanding and exercisable at August 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise
Prices
|
|
Number
|
|
|
Price*
|
|
|
Life*
|
|
|
Number
|
|
|
Price*
|
|
|
$0.0700
|
|
|
7,000
|
|
|
$
|
0.0700
|
|
|
|
8.93
|
|
|
|
2,042
|
|
|
$
|
0.0700
|
|
$0.1270
|
|
|
10,000
|
|
|
$
|
0.1270
|
|
|
|
4.11
|
|
|
|
10,000
|
|
|
$
|
0.1270
|
|
$0.1470
|
|
|
6,414,247
|
|
|
$
|
0.1470
|
|
|
|
6.36
|
|
|
|
5,750,080
|
|
|
$
|
0.1470
|
|
$0.1473
|
|
|
20,000
|
|
|
$
|
0.1473
|
|
|
|
6.78
|
|
|
|
16,042
|
|
|
$
|
0.1473
|
|
$0.2800
|
|
|
73,625
|
|
|
$
|
0.2800
|
|
|
|
7.70
|
|
|
|
41,810
|
|
|
$
|
0.2800
|
|
$0.3900
|
|
|
30,000
|
|
|
$
|
0.3900
|
|
|
|
5.62
|
|
|
|
30,000
|
|
|
$
|
0.3900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,554,872
|
|
|
|
|
|
|
|
|
|
|
|
5,849,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the composition of B-2 Preferred
Stock options outstanding and exercisable at August 25,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
|
Number
|
|
Price*
|
|
Life*
|
|
Number
|
|
Price*
|
|
$0.02447
|
|
|
9,899,559
|
|
|
$
|
0.02447
|
|
|
|
8.45
|
|
|
|
5,362,261
|
|
|
$
|
0.02447
|
|
|
|
|
*
|
|
Price and Life reflect the weighted
average exercise price and weighted average remaining
contractual life, respectively.
|
F-127
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for the year ended
December 31, 2008:
|
|
|
|
|
|
|
Common
|
|
B-2 Preferred
|
|
|
Stock Options
|
|
Stock Options
|
|
Approximate risk-free rate
|
|
2.80%
|
|
2.80%
|
Average expected life
|
|
6.5 years
|
|
6.5 years
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
Volatility
|
|
80%
|
|
80%
|
Estimated fair value per share
|
|
$0.0025
|
|
$0.0050
|
Note 6
Income Taxes
Components reflected in the statements of income are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
16,567,435
|
|
|
|
(19,829,790
|
)
|
State
|
|
|
1,557,853
|
|
|
|
(1,932,075
|
)
|
Change in valuation allowance
|
|
|
(18,125,288
|
)
|
|
|
21,761,865
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Differences between the income tax expense reported in the
statements of operations and the amount computed by applying the
statutory federal income tax rate of 34% to loss before income
taxes are due primarily to the effects of state income taxes,
certain nondeductible expenses, and the change in the valuation
allowance recorded on the Companys net deferred tax assets.
F-128
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The net current and long-term deferred tax assets and
(liabilities) in the accompanying balance sheets include the
following:
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accrued liabilities and other
|
|
$
|
376,158
|
|
|
$
|
275,013
|
|
Allowance for bad debt
|
|
|
1,865
|
|
|
|
10,562
|
|
Deferred revenue
|
|
|
1,474,050
|
|
|
|
2,226,723
|
|
Bridge note derivative liability
|
|
|
|
|
|
|
18,440,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,852,073
|
|
|
|
20,952,533
|
|
Non-current
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
30,089,245
|
|
|
|
29,429,066
|
|
Property, equipment, and licensed software
|
|
|
196,989
|
|
|
|
103,269
|
|
Deferred revenue
|
|
|
1,653,017
|
|
|
|
1,430,575
|
|
Research and development costs
|
|
|
8,776
|
|
|
|
9,945
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
|
33,800,100
|
|
|
|
51,925,388
|
|
Valuation allowance
|
|
|
(33,800,100
|
)
|
|
|
(51,925,388
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
For income tax reporting purposes, the Company has approximately
$81,000,000 of net operating loss carryforwards that expire at
various dates through 2029. The Tax Reform Act of 1986 contains
provisions that limit the net operating loss carryforwards
available to be used in any given year in the event of a
significant change in ownership interests. The rules regarding
such limitations are complex, and management did not complete
its assessment as to whether a limitation has, in fact, occurred
since the Company did not generate taxable income during the
period ended August 25, 2009 and December 31, 2008.
Realization of net operating loss carryforwards is dependent on
generating sufficient taxable income prior to their expiration
dates.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Due to the
structure of the sale of the Company as discussed in
Note 2, management believes it is more likely than not that
the Company will not realize the benefits of these deductible
differences and therefore has established a full valuation
allowance.
Note 7
Employee Benefit Plan
Effective May 1, 2001, the Company adopted a retirement
savings plan. The Vericept Corporation, Inc. 401(k) Profit
Sharing Plan (the Plan) is a defined contribution
plan and covers all employees of the Company. The Plan is
subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended, and Section 401(k) of the
Internal Revenue Code.
The assets of the Plan are held and the related investments are
executed by the Plans trustee. Participants in the Plan
have investment alternatives in which to place their funds and
may place their fund in one or more of these investment
alternatives. Administrative fees are paid by the Company on
behalf of the Plan. The Plan provides for discretionary matching
contributions by the Company. The Company contributed $33,680
and $23,820 for the
F-129
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
period ended August 25, 2009 and for the year ended
December 31, 2008, respectively. Effective November 2009,
the Plan was terminated.
Note 8
Commitments and Contingencies
Operating
Leases
During February 2005, the Company entered into an office lease
agreement for the Denver administrative offices through November
2010. The lease was terminated by mutual consent of the parties
effective July 31, 2009, and the Company was released from
all liabilities under the lease and was obligated to pay
$160,000 in lease termination fees. Under the agreement, the
Company was allowed to occupy the space through October 2009 for
$30,000 per month beginning August 1, 2009. The termination
payments and post lease occupancy payments were classified as
rent expense. Upon termination of the lease, the Company
released the remaining balance of the deferred rent accrual of
$67,670. Rent expense under this lease was $162,698 and $489,812
for the period ended August 25, 2009 and the year ended
December 31, 2008, respectively.
During January 2007, the Company entered into an office lease
agreement for the Boston administrative offices beginning March
2007 and ending March 2011. Rent expense under this lease was
$194,492 and $257,522 for the period ended August 25, 2009
and the year ended December 31, 2008, respectively.
The Company also leases equipment under noncancelable operating
leases. Rent expense under these leases was $41,972 and $74,390
for the period ended August 25, 2009 and the year ended
December 31, 2008, respectively.
Future minimum lease payments under these leases are
approximately as follows:
|
|
|
|
|
Year Ending August
25,
|
|
|
|
|
2010
|
|
$
|
245,700
|
|
2011
|
|
|
123,667
|
|
|
|
|
|
|
|
|
$
|
369,367
|
|
|
|
|
|
|
Commitments
In May 2006, the Company entered into an amendment to an
existing software license agreement. The software covered by the
agreement is embedded in the Companys product. The
amendment, which had a term through July 2008, charged a
one-time unlimited use license fee of $420,000 with annual
maintenance fees of $84,000. The license fee was being amortized
over the remaining term of the agreement, and the annual
maintenance fee was amortized over 12 months. In July 2007,
the Company entered into a second amendment to this existing
software license agreement. This amendment, which had a term
through July 2010, charged a one-time fee of $400,000 for an
unlimited use license and maintenance through the term of the
agreement. The fee is being amortized over the term of the
agreement.
In September 2006, the Company entered into a software license
and marketing agreement through December 31, 2009. The
software covered by the agreement is embedded in the
Companys product. The agreement includes minimum quarterly
commitments for software license royalty fees that were set at
$250,000 per quarter. Software license royalty fees in excess of
these minimums and maintenance fees will be due in addition to
these amounts. In 2009, the agreement was amended so that the
minimum quarterly commitments, including maintenance fees, were
reduced to $50,000 per quarter through the second quarter of
2010 and $100,000 per quarter through the second quarter of
2012, and the aggregate amount of the minimum quarterly
commitments can be reduced based on fees paid to the licensor
under another partner agreement it has with the Acquiring
Company.
In March 2008, the Company entered into a two-year software
license agreement. The software is embedded in the
Companys product. The agreement includes a one-time
unlimited use license fee of $220,000 and $29,500 per
F-130
VERICEPT
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
year for maintenance. The license fee was being amortized over
the term of the agreement, and the annual maintenance fees were
amortized over 12 months. In December 2008, the agreement
was amended to allow the Company to embed the software into an
additional product and the term was extended though March 2011.
The amendment includes a one-time unlimited use license fee of
$100,000 and $10,000 per year for maintenance. The license fee
is being amortized over the remaining term of the amended
agreement, and the annual maintenance fees are amortized over
12 months. The unamortized portion of initial license fee
at the time of the amendment is being amortized over the term
extended term of the amendment.
In September 2008, the Company entered into a two-year software
license agreement for calendar 2008 and 2009. The software
covered by the agreement is embedded in the Companys
product. The agreement includes royalty and related maintenance
payments based on the Companys sales of royalty bearing
products. The agreement includes a prepaid royalty payment of
$54,300 and initial annual support fees of $5,973. The royalty
and maintenance fees were amortized to expense ratably over
24 months and the annual maintenance was amortized over
12 months. The royalties are expensed as incurred and the
maintenance is amortized over the maintenance term.
Litigation
In the normal course of business, the Company is party to
litigation from time to time. The Company maintains insurance to
cover certain actions and believes that resolution of such
litigation will not have a material adverse effect on the
Company.
Product
Warranties
The Companys agreements with customers generally state the
Companys software, documentation, maintenance services,
professional services, and any other services that may be
provided are provided as is without any warranty of
any kind. As such, the Company has not incurred warranty costs,
and does not maintain a warranty reserve.
Product
Indemnifications
The Companys software arrangements generally include a
product indemnification provision that will indemnify and defend
a client in actions brought against the client that claim the
Companys products infringe upon a copyright, trade secret,
or valid patent. Historically, the Company has not incurred any
significant costs related to product indemnification claims, and
as a result, does not maintain a reserve for such exposure.
Note 9
Related Party Transactions
Accounts payable related party represents amounts
payable at year-end under an agreement with an entity in which
the CEO has an ownership interest. The agreement provides
administrative and consulting services until terminated with
14-days
written notice. Total expenditures incurred under this agreement
were $5,700 and $79,197 in 2009 and 2008, respectively.
The Company had an agreement with an entity in which an investor
is affiliated. The agreement provided technical support and
contractual services. In 2009, this entity released the Company
from certain obligations under this agreement including $105,293
of fees for work performed. Total net expenditures incurred
under this agreement were $52,179 and $268,772 in 2009 and 2008,
respectively.
Note 10
Subsequent Events
On August 26, 2009, the Company merged with and into
Trustwave Acquisition Inc. under the name of TW Vericept
Corporation, a Delaware corporation (Note 2).
F-131
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth all costs and expenses, other
than the underwriting discounts and commissions payable by us,
in connection with the offer and sale of the securities being
registered. All amounts shown are estimates except for the SEC
registration fee and the Financial Industry Regulatory
Authority, Inc., or FINRA filing fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
11,610
|
|
FINRA filing fee
|
|
|
10,500
|
|
Stock exchange listing fee
|
|
|
*
|
|
Printing expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Miscellaneous expenses
|
|
|
*
|
|
|
|
|
|
|
Total expenses
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
*
|
|
To be provided by amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 102(b)(7) of the Delaware General Corporation Law,
or the DGCL, allows a corporation to provide in its
certificate of incorporation that a director of the corporation
will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director, except where the director breached the duty of
loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase in violation of
Delaware corporate law or obtained an improper personal benefit.
Our amended and restated certificate of incorporation will
provide for this limitation of liability.
Section 145 of the DGCL, or Section 145,
provides that a Delaware corporation may indemnify any person
who was, is or is threatened to be made, party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer,
director, employee or agent of such corporation or is or was
serving at the request of such corporation as a director,
officer, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such person acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the corporations best interests and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe that his or her conduct was illegal. A Delaware
corporation may indemnify any persons who are, were or are
threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation
by reason of the fact that such person is or was a director,
officer, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys
fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or
suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the
corporations best interests, provided that no
indemnification is permitted without judicial approval if the
officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably
incurred.
Section 145 further authorizes a corporation to purchase
and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation or is or
was serving at the request of the corporation as a director,
officer, employee or agent of another corporation or enterprise,
against any liability asserted against
II-1
him and incurred by him in any such capacity, or arising out of
his or her status as such, whether or not the corporation would
otherwise have the power to indemnify him under Section 145.
Our amended and restated certificate of incorporation will
provide that we must indemnify our directors and officers to the
fullest extent authorized by the DGCL and must also pay expenses
incurred in defending any such proceeding in advance of its
final disposition upon delivery of an undertaking, by or on
behalf of an indemnified person, to repay all amounts so
advanced if it should be determined ultimately that such person
is not entitled to be indemnified under this section or
otherwise.
We have entered into indemnification agreements with certain of
our officers and directors pursuant to which we have agreed to
indemnify such persons against all expenses and liabilities
incurred or paid by such person in connection with any
proceeding arising from the fact that such person is or was an
officer or director of our company or one of our subsidiaries,
and to advance expenses as incurred by or on behalf of such
person in connection therewith.
Prior to the completion of this offering, we expect to enter
into indemnity agreements with each of our directors and
executive officers in which we will agree to indemnify, defend
and hold harmless, and also advance expenses as incurred, to the
fullest extent permitted under applicable law, from damage
arising from the fact that such person is or was an officer or
director of our company or our subsidiaries.
The indemnification rights set forth above shall not be
exclusive of any other right which an indemnified person may
have or hereafter acquire under any statute, provision of our
amended and restated certificate of incorporation, our amended
and restated bylaws, agreement, vote of stockholders or
disinterested directors or otherwise.
We expect to maintain standard policies of insurance that
provide coverage (1) to our directors and officers against
loss rising from claims made by reason of breach of duty or
other wrongful act and (2) to us with respect to
indemnification payments that we may make to such directors and
officers.
The proposed form of Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification to our directors and officers by the
underwriters against certain liabilities.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
Set forth below is certain information regarding unregistered
securities sold or issued by the registrant during the past
three years. No underwriters were involved in any of the
issuances or grants described below.
The table below sets forth certain information regarding our
sales and issuances of unregistered securities since
January 1, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Sale
|
|
Title of Security
|
|
Number of Shares
|
|
Proceeds
|
|
June 3,
2008(1)
|
|
|
Series B preferred stock
|
|
|
|
1,019,606
|
|
|
$
|
1,733,333
|
|
June 13,
2008(1)
|
|
|
Series B preferred stock
|
|
|
|
4,862,745
|
|
|
|
8,266,667
|
|
October 8,
2008(2)
|
|
|
Class A common stock
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
(1)
|
|
Sold to existing stockholders and
DBRC Investments, LLC.
|
(2)
|
|
Issued to a consultant as
consideration for advisory services.
|
The table below sets forth certain information regarding
warrants to purchase our Class A common stock that we have
issued since January 1, 2008:
|
|
|
|
|
|
|
|
|
Issue Date
|
|
Number of Shares
|
|
Exercise Price
|
|
March 1,
2010(1)
|
|
|
953,884
|
|
|
$
|
1.08
|
|
March 1,
2010(2)
|
|
|
82,639
|
|
|
|
6.05
|
|
March 1,
2010(2)
|
|
|
25,000
|
|
|
|
3.00
|
|
September 22,
2010(3)
|
|
|
500,000
|
|
|
|
2.05
|
|
|
|
|
(1)
|
|
Issued as partial consideration in
connection with our acquisition of Intellitactics.
|
II-2
|
|
|
(2)
|
|
In connection with our acquisition
of Intellitactics, we assumed certain outstanding warrants to
purchase stock of Intellitactics. Such warrants were converted
into warrants to purchase shares of our Class A common
stock.
|
(3)
|
|
Issued to Stuart Harvey, one of our
directors.
|
The offers, sales and issuances of these securities were deemed
to be exempt from registration under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the
Securities Act since each such transaction did not involving a
public offering, and all recipients of these securities were
accredited investors within the meaning of Rule 501 of
Regulation D of the Securities Act. These offers, sales and
issuances were generally made to our employees, executive
officers, existing stockholders or persons with whom we
otherwise had a business relationship.
The table below sets forth information with respect to options
granted by us since January 1, 2008. All of the options
were granted to our employees under our 2001 Stock Incentive
Plan and are exercisable for shares of our Class A common
stock.
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
Date of Grant
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
May 12, 2008
|
|
|
25,000
|
|
|
$
|
0.64
|
|
May 12, 2008
|
|
|
620,500
|
|
|
|
0.78
|
|
July 24, 2008
|
|
|
90,000
|
|
|
|
0.78
|
|
October 30, 2008
|
|
|
373,000
|
|
|
|
0.78
|
|
March 9, 2009
|
|
|
1,220,000
|
|
|
|
0.72
|
|
April 30, 2009
|
|
|
87,000
|
|
|
|
0.72
|
|
August 16, 2009
|
|
|
35,500
|
|
|
|
0.72
|
|
October 26, 2009
|
|
|
83,500
|
|
|
|
0.79
|
|
December 9, 2009
|
|
|
2,006,500
|
|
|
|
0.79
|
|
January 6, 2010
|
|
|
1,000,000
|
|
|
|
1.15
|
|
June 3, 2010
|
|
|
461,500
|
|
|
|
1.08
|
|
September 22, 2010
|
|
|
342,000
|
|
|
|
2.05
|
|
December 16, 2010
|
|
|
46,000
|
|
|
|
2.89
|
|
January 25, 2011
|
|
|
1,138,000
|
|
|
|
2.89
|
|
March 4, 2011
|
|
|
2,636,000
|
|
|
|
2.89
|
|
April 4, 2011
|
|
|
12,500
|
|
|
|
2.05
|
|
April 4, 2011
|
|
|
29,000
|
|
|
|
2.89
|
|
April 18, 2011
|
|
|
113,000
|
|
|
|
2.89
|
|
The aggregate exercise price for the options set forth above is
$17,303,765. These grants were made in the ordinary course of
business and did not involve any cash payment from the
recipients. These grants did not involve a sale of
securities for purposes of Section 2(3) of the Securities
Act and were otherwise made in reliance on Rule 701 under
the Securities Act.
Appropriate legends were affixed to the securities issued in all
of these transactions. None of the share numbers set forth in
this Item 15 have been adjusted to give effect to the
Recapitalization.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
The exhibit index attached hereto is incorporated herein by
reference.
II-3
|
|
(b)
|
Financial
Statement Schedule
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Trustwave Holdings, Inc.:
Our audits of the consolidated financial statements referred to
in our report dated April 21, 2011 appearing in this
Registration Statement on
Form S-1
of Trustwave Holdings, Inc. also included an audit of the
financial statement schedule listed in Item 16(b) of this
Registration Statement on
Form S-1.
In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers
LLP
Chicago, Illinois
April 21, 2011
II-4
SCHEDULE II
Valuation and Qualifying Accounts
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
|
|
|
Acquired
|
|
|
Balance
|
|
|
|
|
|
|
Beginning
|
|
|
Charged
|
|
|
Write-offs,
|
|
|
in Business
|
|
|
at End of
|
|
|
|
|
|
|
of Period
|
|
|
to Expense
|
|
|
Net of Recoveries
|
|
|
Combinations
|
|
|
Period
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
$
|
790
|
|
|
$
|
364
|
|
|
$
|
(673
|
)
|
|
$
|
|
|
|
$
|
481
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
481
|
|
|
|
662
|
|
|
|
(552
|
)
|
|
|
|
|
|
|
591
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
591
|
|
|
|
1,476
|
|
|
|
(520
|
)
|
|
|
|
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
$
|
5,827
|
|
|
$
|
609
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,436
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
6,436
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
6,544
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
6,544
|
|
|
|
1,618
|
|
|
|
|
|
|
|
16,242
|
|
|
|
24,404
|
|
|
|
|
|
II-5
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
referenced in Item 14 of this registration statement or
otherwise, the registrant has been advised that in the opinion
of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time
it was declared effective; and
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at the time shall
be deemed to be the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to
registration statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Chicago, State of Illinois, on
June 3, 2011.
Trustwave Holdings, Inc.
|
|
|
|
By:
|
/s/ Robert
J. McCullen
|
Name: Robert J. McCullen
|
|
|
|
Title:
|
Chairman, Chief Executive Officer and
President
|
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to registration statement has been signed
by the following persons in the capacities and on the date
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
J. McCullen
Robert
J. McCullen
|
|
Chairman, Chief Executive Officer
and President
(principal executive officer)
|
|
June 3, 2011
|
|
|
|
|
|
/s/ Mark
Iserloth
Mark
Iserloth
|
|
Chief Financial Officer
(principal financial officer and
principal accounting officer)
|
|
June 3, 2011
|
|
|
|
|
|
*
Andrew
Bokor
|
|
Director
|
|
June 3, 2011
|
|
|
|
|
|
*
Kevin
Bradford
|
|
Director
|
|
June 3, 2011
|
|
|
|
|
|
*
Richard
Garman
|
|
Director
|
|
June 3, 2011
|
|
|
|
|
|
*
Stuart
C. Harvey Jr.
|
|
Director
|
|
June 3, 2011
|
|
|
|
|
|
*
Richard
Kiphart
|
|
Director
|
|
June 3, 2011
|
|
|
|
|
|
*
Timothy
Nicholson
|
|
Director
|
|
June 3, 2011
|
|
|
|
|
|
*
Joseph
Patanella
|
|
Director
|
|
June 3, 2011
|
II-7
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
Director
|
|
June 3, 2011
|
|
|
* |
The undersigned by signing his name hereto, does sign and
execute this Amendment No. 1 to Registration Statement
on Form S-1 pursuant to the Power of Attorney executed by
the above-named officers and directors of Trustwave Holdings,
Inc. and filed with the Securities and Exchange Commission.
|
Mark Iserloth
Attorney-in-Fact
II-8
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1*
|
|
Form of Amended and Restated Certificate of Incorporation of
Trustwave Holdings, Inc., to be effective upon completion of
this offering.
|
|
3
|
.2*
|
|
Form of Amended and Restated Bylaws of Trustwave Holdings, Inc.,
to be effective upon completion of this offering.
|
|
4
|
.1*
|
|
Specimen Common Stock certificate.
|
|
5
|
.1**
|
|
Form of Opinion of Kirkland & Ellis LLP.
|
|
10
|
.1**
|
|
Amended and Restated Loan and Security Agreement, dated as of
August 19, 2009, by and among Trustwave Holdings, Inc., TW
Mirage Networks, Inc., Trustwave Intermediate, Inc. and TW
Vericept Corporation, as borrowers, and Silicon Valley Bank.
|
|
10
|
.2**
|
|
First Loan Modification Agreement, dated as of October 18,
2009, by and among Trustwave Holdings, Inc., TW Mirage Networks,
Inc., Trustwave Intermediate, Inc. and TW Vericept Corporation,
as borrowers, and Silicon Valley Bank.
|
|
10
|
.3**
|
|
Consent and Second Loan Modification Agreement, dated as of
January 6, 2010, by and among Trustwave Holdings, Inc.,
Trustwave Intermediate, Inc. and TW Vericept Corporation, as
borrowers, and Silicon Valley Bank.
|
|
10
|
.4**
|
|
Consent and Third Loan Modification Agreement, dated as of
March 1, 2010, by and among Trustwave Holdings, Inc.,
Trustwave Intermediate, Inc. and TW Vericept Corporation, as
borrowers, and Silicon Valley Bank.
|
|
10
|
.5**
|
|
Joinder and Fourth Loan Modification Agreement, dated as of
April 7, 2010, by and among Trustwave Holdings, Inc.,
Trustwave Intermediate, Inc. and TW Vericept Corporation, as
borrowers, and Silicon Valley Bank.
|
|
10
|
.6**
|
|
Waiver and Fifth Loan Modification Agreement, dated as of
August 30, 2010, by and among Trustwave Holdings, Inc.,
Trustwave Intermediate, Inc. and TW Vericept Corporation,
as borrowers, and Silicon Valley Bank.
|
|
10
|
.7**
|
|
Sixth Loan Modification Agreement, dated as of November 2,
2010, by and among Trustwave Holdings, Inc., Trustwave
Intermediate, Inc. and TW Vericept Corporation, as
borrowers and Silicon Valley Bank.
|
|
10
|
.8**
|
|
Seventh Loan Modification Agreement, dated as of
November 2, 2010, by and among Trustwave Holdings, Inc.,
Trustwave Intermediate, Inc. and TW Vericept Corporation,
as borrowers, and Silicon Valley Bank.
|
|
10
|
.9**
|
|
Trustwave Holdings, Inc. 2001 Stock Incentive Plan.
|
|
10
|
.10**
|
|
Form of Stock Option Agreement under the 2001 Stock Incentive
Plan.
|
|
10
|
.11*
|
|
Form of 2011 Incentive Plan.
|
|
10
|
.12*
|
|
Form of Stock Option Agreement under the 2011 Incentive Plan.
|
|
10
|
.13*
|
|
Form of Restricted Stock Agreement under the 2011 Incentive Plan.
|
|
10
|
.14**
|
|
Investor Rights Agreement, dated as of March 14, 2005, by
and among Trustwave Holdings, Inc. and the investors and
stockholders named therein.
|
|
10
|
.15**
|
|
Amendment to Investor Rights Agreement, dated as of
December 29, 2006, by and among Trustwave Holdings, Inc.
and the persons signatory thereto.
|
|
10
|
.16**
|
|
Second Amendment to Investor Rights Agreement, dated as of
June 3, 2008, by and among Trustwave Holdings, Inc. and the
persons signatory thereto.
|
|
10
|
.17**
|
|
Third Amendment to Investor Rights Agreement, dated as of
August 26, 2009, by and among Trustwave Holdings, Inc. and
the persons signatory thereto.
|
|
10
|
.18**
|
|
Fourth Amendment to Investor Rights Agreement, dated as of March
1, 2010, by and among Trustwave Holdings, Inc. and the persons
signatory thereto.
|
II-9
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.19**
|
|
Stockholders Agreement, dated as of March 14, 2005, by and
among Trustwave Holdings, Inc. and the investors and
stockholders named therein.
|
|
10
|
.20**
|
|
Amendment to Stockholders Agreement, dated as of
December 29, 2006, by and among Trustwave Holdings, Inc.
and the persons signatory thereto.
|
|
10
|
.21**
|
|
Second Amendment to Stockholders Agreement, dated as of
June 3, 2008, by and among Trustwave Holdings, Inc. and the
persons signatory thereto.
|
|
10
|
.22**
|
|
Third Amendment to Stockholders Agreement, dated as of
August 26, 2009, by and among Trustwave Holdings, Inc. and
the persons signatory thereto.
|
|
10
|
.23**
|
|
Fourth Amendment to Stockholders Agreement, dated as of
September 8, 2009, by and among Trustwave Holdings, Inc. and the
persons signatory thereto.
|
|
10
|
.24**
|
|
Fifth Amendment to Stockholders Agreement, dated as of March 1,
2010, by and among Trustwave Holdings, Inc. and the persons
signatory thereto.
|
|
10
|
.25**
|
|
Sixth Amendment to Stockholders Agreement, dated as of
June 18, 2010, by and among Trustwave Holdings, Inc. and
the persons signatory thereto.
|
|
10
|
.26**
|
|
Seventh Amendment to Stockholders Agreement, dated as of
September 22, 2010, by and among Trustwave Holdings Inc.
and the persons signatory thereto.
|
|
10
|
.27**
|
|
Warrant to Purchase Stock, dated as of September 22, 2010,
by and among Trustwave Holdings, Inc. and Stuart Harvey.
|
|
10
|
.28*
|
|
Employment Agreement, dated as of May 22, 2008, by and
among Trustwave Holdings, Inc. and Andrew Bokor.
|
|
10
|
.29*
|
|
Employment Agreement, dated as of March 1, 2011, by and
among Trustwave Holdings, Inc. and Mark Iserloth.
|
|
10
|
.30*
|
|
Employment Agreement, dated as of March 1, 2011, by and
among Trustwave Holdings, Inc. and Douglas Klotnia.
|
|
10
|
.31*
|
|
Employment Agreement, dated as of May 22, 2008, by and
among Trustwave Holdings, Inc. and Robert McCullen.
|
|
10
|
.32*
|
|
Employment Agreement, dated as of August 26, 2009, by and
among Trustwave Holdings, Inc. and David Parkinson.
|
|
10
|
.33**
|
|
Asset Purchase Agreement, dated as of January 6, 2010, by
and among Trustwave Holdings, Inc. and BitArmor Systems Inc.
|
|
10
|
.34**
|
|
Agreement and Plan of Merger and Reorganization, dated as of
March 1, 2010, by and among Trustwave Holdings, Inc.,
Ambiron Trustwave Government Solutions, Inc., Intellitactics
Inc., Lazard Technology Partners II LP, JMI Equity
Fund IV, L.P., JMI Equity Fund IV (AI), L.P., JMI Euro
Equity Fund IV, L.P., JMI Equity Side Fund, L.P., JMI
Incubator Fund, L.P. and JMI Incubator Fund (QP), L.P.
|
|
10
|
.35**
|
|
Agreement and Plan of Merger and Reorganization, dated as of
June 18, 2010, by and among Trustwave Holdings, Inc.,
Trustwave Acquisition Corp., Breach Security, Inc., SRBA #5,
L.P., Evergreen Partners US Direct Fund III, L.P.,
Evergreen Partners Direct Fund III (Israel) L.P. and
Evergreen Partners Direct Fund III (Israel 1) L.P.
|
|
10
|
.36**
|
|
Indemnification Agreement, dated as of March 14, 2005, by
and between Trustwave Holdings, Inc., Richard Kiphart and David
Valentine.
|
|
10
|
.37**
|
|
Indemnification Agreement, dated as of March 14, 2005, by
and between Trustwave Holdings, Inc., MBK Ventures, LLC, Andrew
Bokor and Robert McCullen.
|
|
10
|
.38**
|
|
Indemnification Agreement, dated as of March 14, 2005, by
and between Trustwave Holdings, Inc., Joseph Patanella and Erik
Schetina.
|
|
10
|
.39**
|
|
Indemnification Agreement, dated as of March 14, 2005, by
and between Trustwave Holdings, Inc., Financial Technology
Management II, LLC, Richard Garman and Kevin Bradford.
|
|
10
|
.40
|
|
Form of indemnification agreement for directors.
|
|
10
|
.41
|
|
Form of indemnification agreement for officers.
|
|
10
|
.42
|
|
General Release, dated as of May 20, 2011, between
Trustwave Holdings, Inc. and David Parkinson.
|
II-10
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
21
|
.1**
|
|
List of subsidiaries of Trustwave Holdings, Inc.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm.
|
|
23
|
.2
|
|
Consent of Grant Thornton LLP, independent registered public
accounting firm.
|
|
23
|
.3
|
|
Consent of Mayer Hoffman McCann P.C., independent registered
public accounting firm.
|
|
23
|
.4
|
|
Consent of Alpern Rosenthal, independent registered public
accounting firm.
|
|
23
|
.5
|
|
Consent of Ehrhardt Keefe Steiner & Hottman PC,
independent registered public accounting firm.
|
|
23
|
.6**
|
|
Consent of Kirkland & Ellis LLP (included in
Exhibit 5.1).
|
|
24
|
.1**
|
|
Powers of Attorney (included on signature page).
|
|
|
|
*
|
|
To be filed by amendment.
|
II-11