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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the Quarterly period ended March 31, 2005
 
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES EXCHANGE ACT 1934
 
    For the transition period from           to
Commission file number: 000-27723
 
SonicWALL, Inc.
(Exact name of registrant as specified in its charter)
 
     
California
   77-0270079
(State or other jurisdiction
of incorporation)		   (I.R.S. Employer
Identification No.)
1143 Borregas Avenue
Sunnyvale, California 94089
(408) 745-9600
fax: (408) 745-9300

(Address of registrant’s principal executive offices)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o
      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
     
Title of Each Class   Outstanding at March 31, 2005
     
Common Stock, no par value   63,955,194 Shares
 
 

TABLE OF CONTENTS
             
        Page
         
 PART I. FINANCIAL INFORMATION     3  
   Financial Statements     3  
     Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004     3  
     Condensed Consolidated Statements of Operations for the three-months ended March 31, 2005 and 2004(unaudited)     4  
     Condensed Consolidated Statements of Cash Flows for the three-months ended March 31, 2005 and 2004(unaudited)     5  
     Notes to Condensed Consolidated Financial Statements(unaudited)     6  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
   Quantitative and Qualitative Disclosures About Market Risk     46  
   Controls and Procedures     47  
 PART II. OTHER INFORMATION     48  
   Legal Proceedings     48  
   Unregistered Sales of Equity Securities and Use of Proceeds     48  
   Defaults Upon Senior Securities     50  
   Submission of Matters to a Vote of Security Holders     50  
   Other Information     50  
   Exhibits     50  
 SIGNATURES     51  
 EXHIBIT 10.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SONICWALL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
                     
    March 31,   December 31,
    2005   2004
         
    (Unaudited)   As restated(1)
    (In thousands)
ASSETS
Current Assets:
                
 
Cash and cash equivalents
   $ 30,876     $ 23,446  
 
Short-term investments
     190,770       229,226  
 
Accounts receivable, net
     19,011       14,204  
 
Inventories
     2,504       2,191  
 
Prepaid expenses and other current assets
     3,712       2,069  
             
   
Total current assets
     246,873       271,136  
Property and equipment, net
     2,890       3,395  
Goodwill
     97,953       97,953  
Purchased intangibles and other assets, net
     12,421       14,361  
             
    $ 360,137     $ 386,845  
             
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
                
 
Accounts payable
   $ 6,499     $ 5,737  
 
Accrued payroll and related benefits
     6,470       7,342  
 
Other accrued liabilities
     3,971       5,117  
 
Deferred revenue
     32,453       30,173  
 
Income taxes payable
     525       500  
             
   
Total current liabilities
     49,918       48,869  
             
Commitments and contingencies (see Note 9)
                
Shareholders’ Equity:
                
 
Common stock
     434,934       463,733  
 
Accumulated other comprehensive loss
     (1,478 )     (846 )
 
Accumulated deficit
     (123,237 )     (124,911 )
             
   
Total shareholders’ equity
     310,219       337,976  
             
    $ 360,137     $ 386,845  
             
 
(1)  Amounts as of December 31, 2004 have been derived from the audited financial statements as of the same date.
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SONICWALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     
    Three Months Ended
    March 31,
     
    2005   2004
         
        As restated
    (In thousands, except
    per share data)
    (Unaudited)
Revenue:
                
 
Product
   $ 18,197     $ 22,718  
 
License and service
     13,608       9,117  
             
   
Total revenue
     31,805       31,835  
Cost of revenue:
                
 
Product
     6,447       8,139  
 
License and service
     1,978       1,515  
 
Amortization of purchased technology
     1,136       1,136  
             
   
Total cost of revenue
     9,561       10,790  
             
Gross margin
     22,244       21,045  
             
Operating expenses:
                
 
Research and development, excluding amortization (recovery) of stock-based compensation of $(75) and $147, respectively
     5,456       5,980  
 
Sales and marketing
     12,171       11,402  
 
General and administrative
     3,550       3,790  
 
Amortization of purchased intangibles
     703       812  
 
Restructuring charges
     —       13  
 
Amortization of stock-based compensation
     (75 )     147  
             
   
Total operating expenses
     21,805       22,144  
             
Income (loss) from operations
     439       (1,099 )
Interest income and other expense, net
     1,356       835  
             
Income (loss) before income taxes
     1,795       (264 )
Provision for income taxes
     (121 )     (85 )
             
Net income (loss)
   $ 1,674     $ (349 )
             
Net income (loss) per share:
                
 
Basic
   $ 0.03     $ (0.00 )
             
 
Diluted
   $ 0.02     $ (0.00 )
             
Shares used in computing net loss per share:
                
 
Basic
     65,713       70,051  
 
Diluted
     67,998       70,051  
             
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SONICWALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
    Three Months Ended
    March 31,
     
    2005   2004
         
        As restated
    (In thousands)
    (Unaudited)
Cash flows from operating activities:
                
 
Net income (loss)
   $ 1,674     $ (349 )
 
Adjustments to reconcile net income (net loss) to net cash provided by (used in) operating activities:
                
   
Depreciation and amortization
     2,517       2,868  
   
Reduction in allowance of doubtful accounts and other
     81       (91 )
   
Amortization (reversal) of stock-based compensation
     (75 )     147  
   
Non-cash restructuring charges
     —       13  
   
Changes in operating assets and liabilities:
                
     
Accounts receivable
     (4,807 )     (3,339 )
     
Inventories
     (313 )     (907 )
     
Prepaid expenses and other current assets
     (1,643 )     (353 )
     
Other assets
     101       (52 )
     
Accounts payable
     762       (961 )
     
Accrued payroll and related benefits
     (872 )     1,877  
     
Other accrued liabilities
     (1,146 )     123  
     
Deferred revenue
     2,280       2,499  
     
Income taxes payable
     25       (51 )
             
       
Net cash provided by (used in) operating activities
     (1,416 )     1,424  
             
Cash flows from investing activities:
                
 
Purchase of property and equipment
     (177 )     (640 )
 
Maturity and sale of short-term investments
     60,846       59,552  
 
Purchase of short-term investments
     (23,100 )     (30,691 )
             
       
Net cash provided by investing activities
     37,569       28,221  
             
Cash flows from financing activities:
                
 
Issuance of common stock under employee stock options and purchase plans
     1,205       10,718  
 
Repurchase of common stock
     (29,928 )     —  
             
       
Net cash provided by (used in) financing activities
     (28,723 )     10,718  
             
Net increase in cash and cash equivalents
     7,430       40,363  
Cash and cash equivalents at beginning of period
     23,446       30,467  
             
Cash and cash equivalents at end of period
   $ 30,876     $ 70,830  
             
Supplemental disclosure of non-cash investing and financing activities:
                
 
Unrealized loss on short-term investments, net of taxes
   $ (632 )   $ 19  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SONICWALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
      The accompanying condensed consolidated financial statements have been prepared by SonicWALL, Inc. (the “Company”), are unaudited and reflect all adjustments which are normal, recurring and, in the opinion of management, necessary for a fair statement of the financial position and the results of operations of the Company for the interim periods presented. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. The condensed consolidated statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these statements do not include all information and footnotes required by generally accepted accounting principles. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods. The information included in this report should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2004 as set forth in the Company’s Annual Report on Form 10-K/A.
2. RESTATEMENT
      The Company restated its consolidated financial statements for the year ended December 31, 2004 and for each of the interim periods therein to correct the amounts recorded under both the Company’s 2004 sales commission and 2004 employee bonus programs. The corrections resulted in a reduction in cost of revenues and operating expenses of approximately $1.1 million for the year ended December 31, 2004. The restatement was reflected in the Annual Report on Form 10-K/A for the year ended December 31, 2004 filed with the Securities and Exchange Commission on May 16, 2005.
      The consolidated statement of cash flows for the period ended March 31, 2004, has been restated to reflect the adjustments on the components of cash flows from operating activities. There was no change to net cash flows from operating, investing and financing activities. The following is a summary of the effects of the restatement on (i) the Company’s consolidated statement of operations for the three months ended March 31, 2004 and (ii) the Company’s condensed consolidated balance sheet at December 31, 2004.
                           
    Three Months Ended March 31, 2004
     
    As    
    Previously    
    Reported   Adjustments   As Restated
             
    (In thousands, except per share amounts)
Revenue
                        
 
Product
   $ 22,718     $ —     $ 22,718  
 
License and service
     9,117       —       9,117  
                   
Total revenue
     31,835       —       31,835  
Cost of revenue
                        
 
Product
     8,120       19       8,139  
 
License and service
     1,505       10       1,515  
 
Amortization of purchased technology
     1,136       —       1,136  
                   
Total cost of revenue
     10,761       29       10,790  
Gross Margin
     21,074       (29 )     21,045  
Operating expenses:
                        
 
Research and development
     5,990       (10 )     5,980  
 
Sales and marketing
     11,258       144       11,402  
 
General and administrative
     3,749       41       3,790  

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SONICWALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                           
    Three Months Ended March 31, 2004
     
    As    
    Previously    
    Reported   Adjustments   As Restated
             
    (In thousands, except per share amounts)
 
Amortization purchased intangibles
     812       —       812  
 
Restructuring charges
     13       —       13  
 
Stock-based compensation
     147       —       147  
                   
Total operating expenses
     21,969       175       22,144  
Loss from operations
     (895 )     (204 )     (1,099 )
Interest income and other expenses, net
     835       —       835  
                   
Loss before income taxes
     (60 )     (204 )     (264 )
Provision for income taxes
     (99 )     14       (85 )
                   
Net loss
   $ (159 )     (190 )   $ (349 )
                   
Basic and diluted net loss per share
   $ 0.00     $ (0.01 )   $ (0.00 )
                         
    December 31, 2004
     
    As    
    Previously    
    Reported   Adjustments   As Restated
             
    (In thousands)
Accrued payroll and related benefits
   $ 8,409     $ (1,067 )   $ 7,342  
Total current liabilities
     49,936       (1,067 )     48,869  
Accumulated deficit
     (125,906 )     995       (124,911 )
Total shareholders’ equity
     336,909       1,067       337,976  
3. CONSOLIDATION
      The consolidated financial statements include the balances of the Company and its wholly owned subsidiaries Sonic Systems International, Inc., a Delaware corporation, Phobos Corporation, a Utah corporation, SonicWALL Switzerland, SonicWALL Norway and SonicWALL B.V., a subsidiary in The Netherlands. Sonic Systems International, Inc. is intended to be a sales office but to date has not had any significant transactions. All intercompany accounts and transactions have been eliminated in consolidation.

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SONICWALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. NET INCOME (LOSS) PER SHARE
      The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented:
                     
    Three Months Ended
    March 31,
     
    2005   2004
         
        As restated
Numerator:
                
 
Net income (loss)
   $ 1,674     $ (349 )
Denominator:
                
 
Weighted average shares used to compute basic EPS
     65,713       70,051  
 
Effect of dilutive securities:
                
   
Dilutive common stock equivalents
     2,230       —  
   
Dilutive common stock warrants
     55       —  
             
 
Weighted average shares used to compute diluted EPS
     67,998       70,051  
             
Net income (loss) per share:
                
   
Basic
   $ 0.03     $ (0.00 )
   
Diluted
   $ 0.02     $ (0.00 )
             
      At March 31, 2005, potentially dilutive securities of approximately 5.7 million consisting of options with a weighted average exercise price of $8.33, have not been considered in the computation of net income per share as these options’ exercise prices were greater than the average market price of common shares for the period.
      At March 31, 2004, potentially dilutive securities of approximately 12.1 million consisting of options and warrants with a weighted average exercise price of $6.31, have not been considered in the computation of net loss per share as their effect would have been anti-dilutive.
5. COMPREHENSIVE INCOME (LOSS)
      Comprehensive income (loss) includes unrealized gains and losses on investment securities that have been reflected as a component of shareholders’ equity and have not affected net income (loss). The amount of income tax expense or benefit allocated to unrealized gains or losses on investment securities is equivalent to the effective tax rate in each of the respective periods. Comprehensive income (loss) is comprised, net of tax, as follows (in thousands):