Attached files
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EX-5.1 - STEELCLOUD INC | v168970_ex5-1.htm |
EX-23.1 - STEELCLOUD INC | v168970_ex23-1.htm |
EX-4.3.2 - STEELCLOUD INC | v168970_ex4-3x2.htm |
EX-10.27.1 - STEELCLOUD INC | v168970_ex10-271.htm |
EX-10.30.2 - STEELCLOUD INC | v168970_ex10-30x2.htm |
As
filed with the Securities and Exchange Commission on December 30,
2009
Registration
No.: 333-158703
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 7
to
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
STEELCLOUD,
INC.
(Exact
name of registrant as specified in its charter)
Commonwealth
of Virginia
|
506
|
54-1890464
|
||
(State
or other jurisdiction of
|
(Primary
SIC Number)
|
(I.R.S.
Employer
|
||
incorporation
or organization)
|
Identification
No.)
|
13962
Park Center Road
Herndon,
VA 20171
(703)
674-5500
(Address,
including zip code, and telephone number, including area code, of principal
executive offices)
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
With
a copy to:
Gersten
Savage LLP
Jay
Kaplowitz, Esq.
Arthur
Marcus, Esq.
Paula
Pescaru, Esq.
600
Lexington Avenue
New York,
NY 10022-6018
Tel:
(212) 752-9700 Fax: (212) 980-5192
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
|
Smaller reporting company
x
|
CALCULATION
OF REGISTRATION FEE
Title of Securities to be Registered
|
Amount to be
Registered (1)
|
Proposed
Maximum
Offering Price
per Share (2)
|
Proposed
Maximum
Aggregate
Offering Price
|
Amount of
Registration
Fee
|
||||||||||||
Common
Stock, par value $0.001 per share underlying placement agent
warrants
|
800,000 | $ | 0.38 | $ | 304,000 | $ | 16.98 |
(1)
|
The
total number of shares of common stock (including shares of common stock
underlying warrants) registered is 32,800,000. The registration fee for
32,800,000 shares was paid with the initial filing of the registration
statement and prior amendments.
|
(2)
|
Estimated solely for the purpose
of calculating the registration fee under Rule 457(o) of the Securities
Act of 1933, as amended.
|
This
Registration Statement shall also cover any additional shares of our common
stock which may become issuable by reason of any stock dividend, stock split,
recapitalization or other similar adjustments.
We hereby
amend this registration statement on such date or dates as may be necessary to
delay its effective date until we 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, as
amended, or until this registration statement shall become effective on such
date as the Securities and Exchange 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. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
Preliminary
Prospectus
|
Dated December
29, 2009
|
Up
to 16,000,000 Shares of Common Stock together with 16,000,000 Common Stock
Purchase Warrants
And
Up
to 800,000 Shares of Common Stock Underlying Placement Agent
Warrants
This
prospectus relates to the offering of 16,000,000 shares of our common stock,
$0.001 par value (the “Shares”) accompanied by 16,000,000 common stock
purchase warrants (the “Warrants”) on a best efforts basis at a fixed price
between $0.08 and $0.30 cents per Share and an exercise price per Warrant
equal to 150% of the final offering Share price, and accordingly, we would
receive gross proceeds of up to $1,280,000, assuming sales at $0.08 per Share,
or up to $4,800,000, assuming sales at $0.30 per Share, in the event that we
sell all of these Shares. The shares of common stock
underlying the Warrants are being registered pursuant to the registration
statement of which this prospectus forms a part. In the event that we are
only able to sell (a) 75% or 12,000,000 of the offered Shares, we would receive
gross proceeds of $960,000 assuming sales at $0.08 per Share, or $3,600,000
assuming sales at $0.30 per Share; (b) 50% or 8,000,000 of the offered Shares,
we would receive gross proceeds of $640,000 assuming sales at $0.08 per Share,
or $2,400,000 assuming sales at $0.30 per Share; (c) 25% or 4,000,000 of the
offered Shares, we would receive gross proceeds of $320,000 assuming sales at
$0.08 per Share, or $1,200,000 assuming sales at $0.30 per Share; or (d) 10% or
1,600,000 of the offered Shares, we would receive gross proceeds of $128,000
assuming sales at $0.08, or $480,000 assuming sales at $0.30. Each Share is
accompanied by one Warrant to purchase one additional share of common stock.
This prospectus also relates to the registration of up to 800,000 shares of
common stock underlying Placement Agent Warrants described below. We will
receive additional proceeds from any exercise of the Warrants and the
Placement Agent Warrants described below.
There is
no minimum number of Shares and accompanying Warrants that must be sold in this
offering and, as a result, we may receive no proceeds or very minimal proceeds
from the sale of the Shares and accompanying Warrants. Proceeds that
we receive from the offering of Shares and accompanying Warrants will not be
placed into escrow.
Each
Warrant will entitle an investor to purchase one share of our common stock for
150% of the final offering Share price, commencing on the sixth month
anniversary of such investor's purchase of the Shares and accompanying Warrants
(the “Purchase”), and expiring on the three year anniversary of the
Purchase.
The
offering will commence promptly after the date of this prospectus and close no
later than 90 days after the date of this prospectus. However, we may
extend the offering for up to 90 days following the expiration of the first
90-day offering period. We will pay all expenses incurred in this
offering.
This
offering is a self-underwritten offering and there will be no underwriter
involved in the sale of the Shares and accompanying Warrants. We
intend to offer the Shares and accompanying Warrants through our officers and
directors who will not be paid any commission for such
sales. We have also retained Westminster Securities, a Division
of Hudson Securities Inc. (OTCBB: HDHL), as our placement agent (the “Placement
Agent”) to use their best efforts to solicit offers to purchase our Shares and
accompanying Warrants in this offering. The Placement Agent is not purchasing
the Shares and accompanying Warrants offered by us, and is not required to sell
any specific number or dollar amount of Shares and accompanying Warrants, but
will assist us in this offering on a “best efforts” basis.
Per Share and
Accompanying
Warrant
|
Total
|
|||||||
Maximum
Offering Price1
|
$
|
0.30
|
$
|
4,800,000
|
||||
Placement
Agent’s Fees1
|
$
|
0.024
|
|
$
|
384,000
|
|||
Maximum
Offering Proceeds before expenses1
|
$
|
0.30
|
$
|
4,800,000
|
1
|
The Placement
Agent will receive a 8% cash fee from the gross proceeds received from the
sale of the Shares and accompanying Warrants (subject to certain
limitations), warrants to purchase an aggregate of 5% of the total Shares
sold in this offering (the “Placement Agent Warrants”) and an expense
allowance of 2% of the proceeds of this offering, but in no event more
than $35,000. For more information related to our arrangement with the
Placement Agent, please see “Plan of Distribution” at page
11.
|
Our
common stock is traded on the NASDAQ Capital Market under the symbol
“SCLD”. On December 28, 2009, the closing price of our common
stock was $0.29. There is no public market for our Warrants and we
have not applied for listing or quotation on any public market. We have
arbitrarily determined the exercise price per Warrant offered hereby. The
offering price bears no relationship to our assets, book value, earnings or any
other customary investment criteria.
Our
business is subject to many risks and an investment in our Shares and the
accompanying Warrants will also involve a high degree of risk. You should
carefully consider the factors described under the heading “risk factors”
beginning at page 7 before investing in the Shares and accompanying
Warrants.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is ___, 2009
TABLE
OF CONTENTS
PAGE
|
||
GENERAL
|
3
|
|
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
|
3
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PROSPECTUS
SUMMARY
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3
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|
RISK
FACTORS
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7
|
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USE
OF PROCEEDS
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10
|
|
DETERMINATION
OF OFFERING PRICE
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10
|
|
DILUTION
|
10
|
|
PLAN
OF DISTRIBUTION
|
11
|
|
DESCRIPTION
OF SECURITIES
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12
|
|
INTERESTS
OF NAMED EXPERTS AND COUNSEL
|
14
|
|
BUSINESS
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14
|
|
DESCRIPTION
OF PROPERTY
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18
|
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LEGAL
PROCEEDINGS
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18
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
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19
|
|
FINANCIAL
STATEMENTS
|
21
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
22
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
36
|
|
DIRECTORS
AND EXECUTIVE OFFICERS
|
36
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
38
|
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
39
|
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EXECUTIVE
COMPENSATION
|
40
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
43
|
|
PROSPECTUS
|
44
|
|
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
II-1
|
|
SIGNATURES
|
II-8
|
2
GENERAL
As used
in this prospectus, references to “the Company”, “SteelCloud”, “we”, “our”,
“ours” and “us” refer to SteelCloud, Inc. and its consolidated subsidiaries,
unless otherwise indicated. In addition, references to our “financial
statements” are to our consolidated financial statements except as the context
otherwise requires.
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
prospectus contains “forward-looking statements” and information relating to our
business that are based on our beliefs as well as assumptions made by us or
based upon information currently available to us. When used in this prospectus,
the words anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,”
“project,” “should” and similar expressions are intended to identify
forward-looking statements. These forward-looking statements include, but are
not limited to, statements relating to our performance in “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”. These statements reflect our current views and assumptions with
respect to future events and are subject to risks and uncertainties. Actual and
future results and trends could differ materially from those set forth in such
statements due to various factors. Such factors include, among others: our
ability to obtain financing in the short term, general economic and business
conditions; industry capacity; industry trends; competition; changes in business
strategy or development plans; project performance; and availability of
qualified personnel. These forward-looking statements speak only as of the date
of this prospectus. Subject at all times to relevant securities law disclosure
requirements, we expressly disclaim any obligation or undertaking to disseminate
any update or revisions to any forward-looking statement contained herein to
reflect any change in our expectations with regard thereto or any changes in
events, conditions or circumstances on which any such statement is based. In
addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
PROSPECTUS
SUMMARY
WHERE
YOU CAN FIND US
Our
principal executive offices are located at 13962 Park Center Road Herndon,
Virginia 20171. Our telephone number is (703) 674-5500, our fax
number is (703) 450-0407 and our website address is www.steelcloud.com .
The information on our website is not incorporated by reference into this
prospectus and should not be relied upon with respect to this
offering.
ABOUT
OUR BUSINESS
Founded
in 1987, we are a developer of mobility software solutions primarily for
the Research In Motion® (“RIM”) Blackberry market. We design and integrate our
software into specialized server appliances targeted at the Federal Government
and in particular the Department of Defense (“DoD”), public sector, commercial,
and remote hosting customers.
We were
originally incorporated as Dunn Computer Operating Company on July 27, 1987
under the laws of the Commonwealth of Virginia. On February 26,
1998, Dunn Computer Corporation ("Dunn") was formed and incorporated in the
Commonwealth of Virginia to become a holding company for several entities
including Dunn Computer Operating Company. On May 15, 2001, our
shareholders approved an amendment to our Articles of Incorporation to change
our corporate name from Dunn Computer Corporation to SteelCloud,
Inc. On December 31, 2003, Dunn was merged with and into
SteelCloud.
3
THE
OFFERING
Securities
Offered
|
We
are offering up to 16,000,000 shares of our common stock, $0.001 par value
(the “Shares”) together with 16,000,000 common stock purchase warrants
(the “Warrants”) on a best efforts basis at a fixed price between $0.08
and $0.30 cents per Share and an exercise price per Warrant equal to 150%
of the final offering Share price, and accordingly, we would receive gross
proceeds of up to $1,280,000, assuming sales at $0.08 per Share, or up to
$4,800,000, assuming sales at $0.30 per Share, in the event that we sell
all of these Shares. In the event that we are only
able to sell (a) 75% or 12,000,000 of the offered Shares, we would receive
gross proceeds of $960,000 assuming sales at $0.08 per Share, or
$3,600,000 assuming sales at $0.30 per Share; (b) 50% or 8,000,000 of the
offered Shares, we would receive gross proceeds of $640,000 assuming sales
at $0.08 per Share, or $2,400,000 assuming sales at $0.30 per Share; (c)
25% or 4,000,000 of the offered Shares, we would receive gross proceeds of
$320,000 assuming sales at $0.08 per Share, or $1,200,000 assuming sales
at $0.30 per Share; or (d) 10% or 1,600,000 of the offered Shares, we
would receive gross proceeds of $128,000 assuming sales at $0.08, or
$480,000 assuming sales at $0.30 per share. Each Share is accompanied
by one Warrant to purchase one additional share of common stock. The
NASDAQ Marketplace Rules require shareholder approval of the issuance of
common stock or securities convertible into common stock equal to 20% or
more of the common stock outstanding before the issuance for less than the
greater of book or market value of the stock. On October 23, 2009 we
received the required approval from our shareholders.
There
is no minimum number of Shares that must be sold in this offering and, as
a result, we may receive no proceeds or very minimal proceeds from the
sale of the Shares and accompanying Warrants. Proceeds that we
receive from the offering of Shares and accompanying Warrants will not be
placed into escrow.
We
have retained Westminster Securities, a Division of Hudson Securities Inc.
(OTCBB: HDHL), as our placement agent (the “Placement Agent”) to use their
best efforts to solicit offers to purchase our Shares and accompanying
Warrants in this offering. The Placement Agent will receive a 8% cash fee
from the gross proceeds of the sale of the Shares and accompanying
Warrants (subject to certain limitations), Placement Agent Warrants to
purchase 5% of the total Shares sold in this offering, and an expense
allowance of 2% of the proceeds of this offering, but in no event more
than $35,000. For more information related to our arrangement with the
Placement Agent, please see “Plan of
Distribution” at page 11.
We
intend to use the net proceeds received from the sale of the Shares and
accompanying Warrants pursuant to this best efforts offering for general
working capital purposes.
|
|
Shares
Underlying Placement Agent Warrants
|
We
are also registering up to 800,000 shares of our common stock, $0.001 par
value, underlying the Placement Agent Warrants.
|
|
Shares
Outstanding Prior to the Offering
|
15,614,001,
as of December 28, 2009.
|
|
Share
to be Outstanding After the Offering
|
31,614,001
(assuming all Shares are sold but excluding shares of common stock
issuable upon exercise of the Warrants and the Placement Agent
Warrants).
|
|
Dividend
Policy
|
We
have not declared or paid any dividends on our common stock since our
inception, and we do not anticipate paying any such dividends for the
foreseeable future.
|
|
Warrants
Outstanding Prior to the Offering
|
1,465,000,
as of December 28, 2009.
|
|
Warrants
to be Outstanding After the Offering:
|
18,265,000
(assuming all (a) Shares and accompanying Warrants are sold, and (b)
800,000, representing the maximum amount of Placement Agent Warrants
issuable to the Placement Agents, are
issued).
|
4
Use
of Proceeds:
|
Proceeds
from this offering will be used for general working capital
purposes.
|
|
NASDAQ
Capital Market Symbol
|
Our
common stock is traded on the Nasdaq Capital Market under the symbol
“SCLD”. Please see “Risk
Factors”– “ If
our common stock is delisted from the NASDAQ Capital Market, the market
price of our common stock could decrease significantly” at page 7,
and “Market for Registrant’s Common Equity,
Related Stockholder Matters” at page 21.
|
|
Risk
Factors:
|
See
“Risk Factors” beginning at
page 7 and the other information in this prospectus for a discussion
of the factors you should consider before deciding to invest in shares of
our common stock.
|
5
SUMMARY
FINANCIAL DATA
The
following summary financial information includes statement of expenses and
balance sheet data from our audited financial statements. The information
contained in this table should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” and the financial statements and
accompanying footnotes included in this prospectus.
Our
financial status creates substantial doubt whether we will continue as a going
concern.
Statement
of Operations
Year
Ended October
31,
|
||||||||
2007
|
2008
|
|||||||
(in
thousands)
|
||||||||
Consolidated
Statement of Operations Data:
|
||||||||
Net
revenues
|
$ | 23,316 | $ | 19,019 | ||||
Gross
profit
|
4,945 | 3,095 | ||||||
Loss
from operations
|
(1,964 | ) | (2,768 | ) | ||||
Net
loss attributable to common stockholders
|
(1,945 | ) | (2,760 | ) | ||||
Basic and
diluted loss per share
|
$ | (0.14 | ) | $ | (0.19 | ) | ||
Weighted
average shares outstanding
|
14,287 | 14,493 |
Balance
Sheet Data
At
October 31,
|
||||||||
2007
|
2008
|
|||||||
(in
thousands)
|
||||||||
Consolidated
Balance Sheet Data:
|
||||||||
Working
capital
|
$ | 3,707 | $ | 1,681 | ||||
Total
assets
|
7,936 | 4,052 | ||||||
Long-term
debt
|
170 | 140 | ||||||
Total
liabilities
|
3,229 | 1,436 | ||||||
Stockholders'
equity
|
4,707 | 2,616 |
6
RISK
FACTORS
An
investment in our Shares and accompanying Warrants involves a
high degree of risk. You should carefully consider the risks described below and
the other information before deciding to purchase the securities offered in this
best efforts offering. The risks described below are not the only ones facing
our company. Additional risks not presently known to us or that we currently
consider immaterial may also adversely affect our business. If any of the
following risks actually happen, our business, financial condition and operating
results could be materially adversely affected. In this case, you could lose all
or part of your investment.
Risks
Related to our Securities
Our
common stock may be subject to substantial price and volume fluctuations due to
a number of factors, many of which are beyond our control, that may prevent our
stockholders from reselling our common stock at a profit.
The
securities markets have experienced significant price and volume fluctuations in
recent months and the market price of our common stock has been volatile. This
market volatility, as well as general economic, market or political conditions,
has, and could continue to, reduce the market price of our common stock. In
addition, our operating results could be below the expectations of public market
analysts and investors, and in response the market price of our common stock
could decrease significantly. Investors may be unable to resell their shares of
our common stock for a profit. The decline in the market price of our common
stock and market conditions generally may adversely affect our ability to raise
additional capital.
As
a “thinly-traded” stock, large sales can place downward pressure on our common
stock price.
Our
common stock, despite certain increases of trading volume from time to time, is
generally considered “thinly traded.” Financing transactions resulting in a
large number of newly issued shares that become readily tradable, or other
events that cause current stockholders to sell shares, could place downward
pressure on the trading price of our common stock. In addition, the lack of a
robust resale market may require a stockholder who desires to sell a large
number of shares to sell the shares in increments over time to mitigate any
adverse impact of the sales on the market price of our common
stock.
The
offering of the Shares and accompanying Warrants is a self-underwritten
offering.
This
offering of Shares and accompanying Warrants is a self-underwritten offering,
which means that we will offer the shares through our officers, directors and
the Placement Agent. This offering does not involve the participation of an
underwriter to market, distribute or sell the shares offered under this
prospectus. Although we have engaged a Placement Agent to use their
best efforts to solicit offers to purchase Shares and Warrants in this offering,
we can offer no assurance that our officers, directors or the
Placement Agent will be successful in selling all or any of the Shares and
accompanying Warrants offered hereby.
If
our common stock is delisted from the NASDAQ Capital Market, the market price of
our common stock could decrease significantly.
We have
received delisting notices from NASDAQ because of our failure to comply
with (1) NASDAQ Market Place Rule 5450(a)(1) because the bid price of our common
stocks closed below the minimum $1.00 per share requirement for 30 consecutive
business days prior to September 15, 2009, and (2) NASDAQ Listing Rule 5550(b)
(formerly known as Market Place Rule 4310(c)(3)), which requires that we
maintain a minimum of (a) $2,500,000 in stockholder’s equity, (b) $35,000,000
market value of listed Securities, or (c) $500,000 of net income from continuing
operations (please see “Market for Registrant’s Common Equity, Related
Stockholder Matters” for additional information). If we are unable to satisfy
the NASDAQ Capital Market continued listing criteria in the future, our common
stock may be delisted from the NASDAQ Capital Market. If this occurs, trading,
if any, in our common stock would thereafter be conducted in the
over-the-counter market on the “pink sheets” or the Over-the-Counter Bulletin
Board. If our common stock is delisted from the NASDAQ Capital Market, a
shareholder may find it more difficult to dispose of, or to obtain quotations as
to the price of our common stock. Additionally, if our common stock is delisted
from the NASDAQ Capital Market, the market price of our common stock could
decrease significantly.
We
may issue more shares in connection with a merger or acquisition; this would
result in substantial dilution to you.
Any
merger or acquisition effected by us may result in the issuance of additional
securities without stockholder approval and may result in substantial dilution
in the percentage of our common stock held by our then existing stockholders.
Moreover, the common stock issued in any such merger or acquisition transaction
may be valued on an arbitrary or non-arm’s-length basis by our management,
resulting in an additional reduction in the percentage of common stock held by
our then existing stockholders. Our Board of Directors has the power to issue
any or all of such authorized but unissued shares without stockholder approval.
To the extent that additional shares of common stock or preferred stock are
issued in connection with a business transaction, combination or otherwise,
dilution to the interests of our stockholders will occur and the rights of the
holders of common stock may be materially adversely affected.
We
may seek to undertake a reverse share split which will reduce the amount of
shares you own.
We may
seek to undertake a reverse share split to increase the trading price of our
common stock and increase investor interest in our Company. In a
reverse share split the number of our outstanding common shares that our
shareholders own will decline but the share price per common share will
generally increase proportionately. Management cannot offer any
assurance that a reverse share split would be successful in increasing the
trading price of our common stock proportionately to the decrease in the number
of outstanding shares, or if successful, that the trading price of our common
stock would not decline shortly after the reverse share split is
effectuated.
Fluctuations
in our quarterly operating results may cause the market price of our common
stock to fluctuate.
Our
operating results have in the past fluctuated from quarter to quarter and we
expect this trend to continue in the future. As a result, the market price of
our common stock could be volatile. In the past, following periods of volatility
in the market price of stock, many companies have been the object of securities
class action litigation. If we were to be sued in a securities class action, it
could result in substantial costs and a diversion of management's attention and
resources which could adversely affect our results of operations.
Our
Board of Directors has the power to designate a series of preferred stock
without shareholder approval that could contain conversion or voting rights that
adversely affect the voting power of holders of our common stock.
Our
Articles of Incorporation authorizes issuance of capital stock including
2,000,000 undesignated preferred shares, and empowers our Board of Directors to
prescribe by resolution and without shareholder approval a class or series of
undesignated shares, including the number of shares in the class or series and
the voting powers, designations, rights, preferences, restrictions and the
relative rights in each such class or series.
7
Because
we do not intend to pay any dividends on our common stock, holders of our common
stock must rely on stock appreciation for any return on their
investment.
We have
not declared or paid any dividends on our common stock since our inception, and
we do not anticipate paying any such dividends for the foreseeable future.
Accordingly, holders of our common stock will have to rely on capital
appreciation, if any, to earn a return on their investment in our common
stock.
Risks
Related to Our Company
Our
auditors have expressed doubt regarding our ability to continue as a going
concern.
The
report of our independent registered public accounting firm on our consolidated
financial statements for the fiscal year ended October 31, 2008 contains an
explanatory paragraph regarding our ability to continue as a going concern based
upon our history of net losses. We have had recurring annual operating
losses since our fiscal year ended October 31, 2004. We expect that
such losses will continue at least until our fiscal year ending October 31,
2010.
We
cannot offer assurances that any of the strategic options that we are
considering to improve our liquidity and provide our Company with working
capital will occur or be successful.
We are
considering a variety of strategic options to improve our liquidity and provide
us with working capital to fund our continuing business operations. These
options include equity offerings, asset sales, debt financing and merger
and acquisition transactions as alternatives to improve our cash needs.
However, there can be no assurance that we will be successful in negotiating or
concluding any of these transactions. If we are unable to consummate
one or more of these transactions, and adequate funds are not available to us or
are not available on acceptable terms, we will likely not be able to continue as
a going concern.
We
may not be able to continue our operations without additional
funding.
As of
July 31, 2009, we had cash and cash equivalents of approximately $366,210 and a
working capital deficit. Management believes our current cash and cash
equivalents are sufficient to maintain our operations for less than
30 days from December 28, 2009. We require between
$1,500,000 and $2,000,000 in cash to continue our operations for the next 12
months, which we may obtain through issuances of debt and/or
equity. Such financing may not be forthcoming. As widely reported,
the domestic financial markets have been extremely volatile in recent
months. If such conditions and constraints continue, we may not be
able to acquire additional funds either through credit markets or through equity
markets. Even if additional financing is available, it may not be available on
terms we find favorable. At this time, there are no anticipated sources of
additional financing in place. Failure to secure the needed additional
financing will have an adverse effect on our ability to remain in
business.
We
may not be able to compete successfully against current and future
competitors.
The
market for our products and services is highly competitive. Many of our
competitors offer broader product lines and have substantially greater
financial, technical, marketing and other resources than we do, which could
seriously harm our net sales and results of operation. Additionally, our
competitors may receive beneficial prices from purchasing component parts in
large quantities and may be parties to product and process technology license
arrangements that are more favorable in terms of pricing and availability than
our arrangements. As a result, we may have difficulty increasing our market
share.
8
Our
new business model relies heavily on the success of BlackBerry products and
services.
We
developed SteelWorks® Mobile and SteelWorks FedMobile in conjunction with
Research in Motion (“RIM”) as a solution specifically designed for the
BlackBerry Enterprise Server (“BES”). SteelWorks® Mobile and
SteelWorks FedMobile is an integrated server appliance that enables virtually
any size organization to implement BES. Our new business model, and
the success of SteelWorks® Mobile and SteelWorks FedMobile, relies heavily on
the success of BlackBerry products and services and any changes in the
technology or the market demand for those products could negatively impact
our business.
If
we are unable to attract, assimilate and retain highly skilled technical
personnel, our business could be seriously harmed.
Our
future success is largely dependent upon our ability to identify, attract, hire,
train, retain and motivate highly skilled technical
personnel. Competition in this market is intense, and we cannot be
certain that we will be able to attract, assimilate or retain sufficiently
qualified personnel. Our inability to do so could have a material adverse effect
on our business, results of operations and financial condition.
9
USE
OF PROCEEDS
The net
proceeds to us from the sale of up to 16,000,000 Shares and accompanying
Warrants to purchase an additional 16,000,000 shares of our common stock,
offered at a fixed public offering price between $0.08 and $0.30 per Share, will
vary depending upon the total number of Shares actually sold. There is no
minimum number of Shares and accompanying Warrants that must be sold in this
offering and, as a result, we may receive no proceeds or very minimal proceeds
from the sale of the Shares and accompanying Warrants. Proceeds that we receive
from the offering of Shares and accompanying Warrants will not be placed into
escrow. Regardless of the number of Shares and accompanying Warrants sold, we
expect to incur offering expenses estimated at approximately $57,000 for legal,
accounting, Securities and Exchange Commission (“SEC”), EDGAR filing
fees, printing, and transfer agent fees in connection with this
offering. Additionally, we will incur Placement Agent fees of 8% of the gross
proceeds of the sale of the Shares and accompanying Warrants.
The table
below sets forth the net proceeds to us from this offering in the event that we
sell 16,000,000, 12,000,000, 8,000,000, 4,000,000 or 1,600,000 Shares at the
minimum offering price of $0.08 and the maximum offering price of
$0.30. This table does not set forth (a) the proceeds we will receive
from the exercise of Warrants or Placement Agent Warrants or (b) all
possibilities. The Placement Agent fees set forth below assume that the
Placement Agent has sold the total number of Shares represented in bold. There
is no guarantee that we will be successful at selling any of the securities
being offered in this prospectus. Accordingly, the actual amount of proceeds we
will raise in this offering, if any, may differ.
$0.08
per
Share
|
$0.30
per
Share
|
|||||||
16,000,000
(100%) Shares Sold
|
||||||||
Gross
Proceeds
|
$ | 1,280,000 | $ | 4,800,000 | ||||
Less
Offering Expenses
|
$ | 57,000 | $ | 57,000 | ||||
Less
Placement Agent Fee
|
$ | 102,400 | $ | 384,000 | ||||
Net
Offering Proceeds
|
$ | 1,120,600 | $ | 4,359,000 | ||||
12,000,000
(75%) Shares Sold
|
||||||||
Gross
Proceeds
|
$ | 960,000 | $ | 3,600,000 | ||||
Less
Offering Expenses
|
$ | 57,000 | $ | 57,000 | ||||
Less
Placement Agent Fee
|
$ | 76,800 | $ | 288,000 | ||||
Net
Offering Proceeds
|
$ | 826,200 | $ | 3,255,000 | ||||
8,000,000
(50%) Shares Sold
|
||||||||
Gross
Proceeds
|
$ | 640,000 | $ | 2,400,000 | ||||
Less
Offering Expenses
|
$ | 57,000 | $ | 57,000 | ||||
Less
Placement Agent Fee
|
$ | 51,200 | $ | 192,000 | ||||
Net
Offering Proceeds
|
$ | 531,800 | $ | 2,151,000 | ||||
4,000,000
(25%) Shares Sold
|
||||||||
Gross
Proceeds
|
$ | 320,000 | $ | 1,200,000 | ||||
Less
Offering Expenses
|
$ | 57,000 | $ | 57,000 | ||||
Less
Placement Agent Fee
|
$ | 25,600 | $ | 96,000 | ||||
Net
Offering Proceeds
|
$ | 237,400 | $ | 1,047,000 | ||||
1,600,000
(10%) Shares Sold
|
||||||||
Gross
Proceeds
|
$ | 128,000 | $ | 480,000 | ||||
Less
Offering Expenses
|
$ | 57,000 | $ | 57,000 | ||||
Less
Placement Agent Fee
|
$ | 10,240 | $ | 38,400 | ||||
Net
Offering Proceeds
|
$ | 60,760 | $ | 384,600 |
Our
officers and directors will not receive any compensation for their efforts in
selling our Shares and the accompanying Warrants.
The net
proceeds from this offering will be used for the general working capital, during
the twelve months following the completion of this offering. In all
instances, after the effectiveness of the registration statement of which this
prospectus forms a part, we will need some amount of working capital to
maintain our general existence and comply with our public reporting obligations.
In addition to changing allocations because of the amount of proceeds received,
we may change the use of proceeds because of changes in our business plan.
Investors should understand that we have wide discretion over the use of
proceeds.
DETERMINATION
OF OFFERING PRICE
The
determination of the offering price for the Shares and the exercise price of the
accompanying Warrants (and the Placement Agent Warrants) has been arbitrarily
determined and does not necessarily relate to our asset value, net worth,
or other established criteria of value, and may not be indicative of prices that
will prevail in the trading market.
DILUTION
Purchasers
of our Shares will experience an immediate dilution of net tangible book
value per share of our common stock. Our net tangible book value as
of December 28, 2009 was approximately $218,578, or $0.01 per share of our
common stock (based upon 15,614,001 shares of our common stock outstanding). Net
tangible book value per share is equal to our total net tangible book value,
which is our total tangible assets less our total liabilities, divided by the
number of shares of our outstanding common stock. Dilution per share equals the
difference between the amount per share paid by purchasers of Shares and
accompanying Warrants in this offering and the net tangible book value
per share of our common stock immediately after this
offering.
The
following table illustrates an offering based on $0.19 per Share, which is
between the minimum offering price of $0.08 per Share and the maximum of $0.30
per Share, and after deducting approximately $57,000 of offering expenses
together with the 8% Placement Agent fee payable by us.
10
Assuming
|
||||||||||||||||||||
100%
or
16,000,000
Shares
Sold
|
75%
or
12,000,000
Shares
Sold
|
50%
or
8,000,000
Shares
Sold
|
25%
or
4,000,000
Shares
Sold
|
10%
or
1,600,000
Shares
Sold
|
||||||||||||||||
Subscription
price per Share
|
$
|
0.19
|
0.19
|
0.19
|
0.19
|
0.19
|
||||||||||||||
Net
tangible book value per Share prior to the offering
|
0.01
|
0.01
|
0.01
|
0.01
|
0.01
|
|||||||||||||||
Increase
per Share attributable to the offering
|
0.13
|
0.11
|
0.09
|
0.05
|
0.02
|
|||||||||||||||
Pro
forma net tangible book value per Share after the offering
|
0.14
|
0.13
|
0.10
|
0.06
|
0.04
|
|||||||||||||||
Dilution
in net tangible book value per Share to purchasers
|
$
|
0.05
|
0.06
|
0.09
|
0.13
|
0.15
|
PLAN
OF DISTRIBUTION
We intend
to sell our Shares and accompanying Warrants during the 90-day period following
the date of this prospectus at a fixed price between $0.08 and $0.30 per Share,
and at an exercise price of $0.12 and $0.45 per Warrant share. For each Share
purchased the buyer will receive one Warrant. There is no minimum
number of Shares and accompanying Warrants that must be sold in this offering
and, as a result, we may receive no proceeds or very minimal proceeds from the
sale of the Shares. Proceeds that we receive from the offering of
Shares and accompanying Warrants will not be placed into escrow. We
may extend this offering for up to 90 days following the expiration of the first
90-day offering period.
We have
retained Westminster Securities, a Division of Hudson Securities Inc., as our
Placement Agent to use their best efforts to solicit offers from selected
investors to purchase our Shares and underlying Warrants in this offering. The
Placement Agent is not obligated to, and has advised us that they will not,
purchase any Shares or Warrants for their own account.
The
compensation of the Placement Agent in connection with serving as placement
agent for this offering will consist of the placement fee and reimbursement of
expenses described below. We will pay the Placement Agent a cash commission fee
of 8% from the gross proceeds of this offering (the “Placement Agent Fee”);
however, the Placement Agent shall not receive Placement Agent Fee for (i)
investments made by Caledonia Capital Corporation (an entity to which we have
issued a promissory note) and our executive officers and directors, and (ii)
investments made by investors introduced by our executive officers or directors
prior to receipt by the Placement Agent of a no-objection letter from FINRA
relating to the Placement Agent’s compensation and services described herein.
Additionally, we will issue to the Placement Agent Placement Agent Warrants (the
Placement Agent Warrants together with the Placement Agent Fee, the “Fee”) to
purchase 5% of the total Shares sold in this offering but excluding all common
stock issued and issuable (i) to Caledonia Capital Corporation and our executive
officers and directors in this offering, and (ii) for investments made by
investors introduced to us by our executive officers or directors prior to
receipt by the Placement Agent of a no-objection letter from FINRA relating to
the Placement Agent’s compensation and services described herein. The Placement
Agent Warrants shall be exercisable at 125% of the final offering Share price
and shall have a term of exercise expiring no later than five years from the
effective date of the registration statement of which this prospectus forms a
part.
The
Placement Agent Warrants shall not have anti-dilution protections or be
transferable for six months from the date of the final closing of this offering
except as permitted by Financial Industry Regulatory Authority (“FINRA”) Rule
5110, in that such Placement Agent Warrants may be transferred during the
restriction period: (i) by operation of law or by reason of our
reorganization; (ii) to any FINRA member firm participating in the offering and
the officers or partners thereof, if all securities so transferred remain
subject to the lock-up restriction set forth in Rule 5110 for the remainder of
the time period; (iii) if the aggregate amount of our securities held
by the holder of the Placement Agent Warrants or related person do not exceed 1%
of the securities being offered; (iv) to the extent of a transfer of a security
that is beneficially owned on a pro-rata basis by all equity owners of an
investment fund, provided that no participating member manages or otherwise
directs investments by the fund, and participating members in the aggregate do
not own more than 10% of the equity in the fund; or (v) in connection
with the exercise or conversion of any security, if all securities received
remain subject to the six month lock-up restriction for the remainder of the
time period.
We have
agreed to reimburse the Placement Agent, subject to compliance with FINRA Rule
5110(f)(2)(D), for its accountable fees, disbursements and expenses (with
supporting invoices/receipts) up to a maximum of 2% of the aggregate gross
proceeds raised in the Financing (excluding (i) investments made by Caledonia
Capital and our executive officers and directors, and (ii) investments made by
investors introduced by our executive officers or directors prior to receipt by
the Placement Agent of a no-objection letter from FINRA relating to the
Placement Agent’s compensation and services described herein) but in no event
more than $35,000. We have agreed to pay an advance of $20,000 for such
expenses, which amount shall be non-refundable to the extent Westminster
provides us with supporting invoices/receipts of actual expenses
incurred.
Furthermore,
we have agreed to indemnify the Placement Agent and its controlling persons from
and against, and to make contributions for payments made by such person ’ s with
respect to, certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended (the “Securities Act”). The Placement Agent
may be deemed an “underwriter” within the meaning of the Securities
Act.
The
Shares and accompanying Warrants will also be sold by our executive officers and
directors. We are relying upon Rule 3a4-1 of the General Rules and Regulations
promulgated under the Securities Act (“Rule 3a4-1”), to not deem our executive
officers and directors as brokers. None of our executive officers or directors
are registered broker-dealers or affiliates of broker-dealers, and to the extent
that our executive officers and directors sell Shares and accompanying Warrants,
no commissions or other remuneration based either directly or indirectly on
transaction in securities will be paid to such persons. In addition, our
executive officers and directors will conduct their selling activity in
accordance with paragraphs (a)(4)(ii) of Rule 3a4-1, in that each person
primarily performs substantial duties for us other than in connection with
transactions in securities, each person is not a broker or dealer or affiliated
with a broker or dealer in the last twelve months and each person does not
participate in selling an offering of securities more than once every twelve
months other than as permitted under Rule 3a4-1
11
DESCRIPTION
OF SECURITIES
Common
Stock
In this
offering, we are offering up to 16,000,000 Shares of our common stock at a fixed
price between $0.08 and $0.30 per share, accompanied by Warrants to
purchase up to an additional 16,000,000 shares of our common stock.
Each Warrant has an exercise price of 150% of the price of the final offering
price of the Shares, has a term of three years, and is exercisable on or
after the six month anniversary from the purchase date until on or before
the three year anniversary of the purchase date. Each Share is accompanied
by one Warrant to purchase one additional share of our common stock. The shares
of common stock underlying the Warrants are being registered pursuant to the
registration statement of which this prospectus forms a part.
The
Shares will be sold during the 90-day period following the date of this
prospectus, which period may be extended for an additional 90 days.
We
are also registering up to 800,000 shares of our common stock underlying
the Placement Agent Warrants.
On December
28, 2009, 15,614,001 shares of our common stock were
outstanding.
The
NASDAQ Marketplace Rules require shareholder approval for the issuance of common
stock or securities convertible into common stock equal to 20% or more of the
common stock outstanding before the issuance for less than the greater of book
or market value of the stock. On October 23, 2009 we received the required
approval from our shareholders.
Warrants
Each
Share will be accompanied by one Warrant to purchase one additional share
of our common stock. The exercise price per Warrant share will be
equal to 150% of the final offering Share price. The Shares
underlying the Warrants will have such rights and preferences which are
attributable to all the shares of our common stock, $0.001 par value. The Shares
of common stock underlying the Warrants are being registered; however, the
Warrants are not being registered and there will be no market for the
Warrants.
Exercise.
Holders of the Warrants may exercise their Warrants to purchase shares of our
common stock on or before the expiration date by delivering (i) an exercise
notice, appropriately completed and duly signed, and (ii) payment of the
exercise price for the number of shares with respect to which the Warrant is
being exercised. Warrants may be exercised in whole or in part, but only for
full shares of common stock, and any portion of a Warrant not exercised prior to
the expiration date shall be and become void and of no value.
The
shares of common stock issuable on exercise of the Warrants will be, when issued
in accordance with the Warrants, duly and validly authorized, issued and fully
paid and non-assessable. We will authorize and reserve at least that number of
shares of common stock equal to the number of shares of common stock issuable
upon exercise of all outstanding Warrants.
Delivery
of Certificates . Upon the holder’s exercise of a Warrant, we will
promptly, but in no event later than five business days after the exercise date,
issue and deliver, or cause to be issued and delivered, a certificate for the
shares of common stock issuable upon exercise of the Warrant, free of
restrictive legends (provided such shares are covered by an effective
registration statement at the time of exercise).
Other
Adjustments . The exercise price and the number of shares of common stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of specific events, including stock dividends, stock splits, and
combinations of our common stock. If we make or issue a dividend or other
distribution payable in securities of the company other than shares of common
stock, or in cash or other property, then each holder’s Warrant will become the
right to receive, upon exercise of such warrant, in addition to the number of
shares of common stock issuable under the Warrant, the same kind and amount of
securities, cash or other property as it would have been entitled to receive
upon the occurrence of such transaction, if the Warrant had been exercised
immediately prior to such transaction.
12
Additional
Provisions . The above summary of certain terms and provisions of the
Warrants is qualified in its entirety by reference to the detailed provisions of
the Warrants, the form of which has been filed as Exhibit 4.2 to the
registration statement of which this prospectus forms a part. We are not
required to issue fractional shares upon the exercise of the Warrants. No
holders of the Warrants will possess any rights as a shareholder under those
Warrants until the holder exercises those Warrants.
Placement Agent
Warrants
The
exercise price per Placement Agent Warrant shall be 125% of the final offering
Share price. The Placement Agent Warrants shall not have anti-dilution
protection or be transferable for six months from the final closing of this
offering, except as otherwise permitted by FINRA Rule 5110. The shares of
common stock underlying the Placement Agent Warrants are being registered;
however, the Placement Agent Warrants are not being registered and there will be
no market for the Placement Agent Warrants.
Exercise
. The Placement Agent may exercise the Placement Agent Warrants
to purchase shares of our common stock for five years from the effective date of
the registration statement of which this prospectus forms a part. The Placement
Agent Warrants may be exercised in whole or in part, but only for full shares of
common stock, and any portion of a Placement Agent Warrant not exercised prior
to the expiration date shall be and become void and of no value.
The
shares of common stock issuable on exercise of the Placement Agent Warrants will
be, when issued in accordance with the Placement Agent Warrants, duly and
validly authorized, issued and fully paid and non-assessable. We will authorize
and reserve at least that number of shares of common stock equal to the number
of shares of common stock issuable upon exercise of the outstanding Placement
Agent Warrants.
Further,
for a period of six months after the issuance date of the Placement Agent
Warrants (which shall not be earlier than the closing date of this offering
pursuant to which the Placement Agent Warrants are being issued), neither the
Placement Agent Warrants nor any shares underlying the Placement Agent Warrants
issued upon exercise of the Placement Agent Warrants shall be sold, transferred,
assigned, pledged, or hypothecated, or be the subject of any hedging, short
sale, derivative, put, or call transaction that would result in the effective
economic disposition of the securities by any person for a period of 180 days
immediately following the date of effectiveness or commencement of sales of this
offering pursuant to which the Placement Agent Warrants are being issued, except
the transfer of any security:
(i) by
operation of law or by reason of our reorganization;
(ii) to
any FINRA member firm participating in the offering and the officers or partners
thereof, if all securities so transferred remain subject to the six month
lock-up restriction for the remainder of the time period;
(iii) if
the aggregate amount of our securities held by the Placement Agent or related
person do not exceed 1% of the securities being offered in this
offering;
(iv) that
is beneficially owned on a pro-rata basis by all equity owners of an investment
fund, provided that no participating member manages or otherwise directs
investments by the fund, and participating members in the aggregate do not own
more than 10% of the equity in the fund; or
(v)
the exercise or conversion of any security, if all securities received remain
subject to the six month lock-up restriction for the remainder of the time
period.
Delivery
of Certificates . Upon the Placement Agent’s exercise of a Placement
Agent Warrant, we will promptly, but in no event later than five business days
after the exercise date, issue and deliver, or cause to be issued and delivered,
a certificate for the shares of common stock issuable upon exercise of the
Placement Agent Warrant, free of restrictive legends (provided that such shares
are covered by an effective registration statement at the time of
exercise).
Other
Adjustments . Subject to FINRA Rule 5110, the exercise price and the
number of shares of common stock purchasable upon the exercise of the Placement
Agent Warrants are subject to adjustment upon the occurrence of specific events,
including stock dividends, stock splits, and combinations of our common stock.
If we make or issue a dividend or other distribution payable in securities other
than shares of common stock, or in cash or other property, then each Placement
Agent Warrant will become the right to receive, upon exercise of such Placement
Agent Warrant, in addition to the number of shares of common stock issuable
under the Placement Agent Warrant, the same kind and amount of securities, cash
or other property as it would have been entitled to receive upon the occurrence
of such transaction, if the Placement Agent Warrant had been exercised
immediately prior to such transaction.
Additional
Provisions . The above summary of certain terms and provisions of the
Placement Agent Warrants is qualified in its entirety by reference to the
detailed provisions of the Placement Agent Warrants, the form of which has been
filed as Exhibit 4.3.2 to the registration statement of which this prospectus
forms a part. We are not required to issue fractional shares upon the exercise
of the Placement Agent Warrants. The Placement Agent will not possess any rights
under the Placement Agent Warrants as a shareholder under those Placement Agent
Warrants until the Placement Agent exercises the Placement Agent
Warrants.
13
INTERESTS
OF NAMED EXPERTS AND COUNSEL
The
financial statements as of October 31, 2008 and 2007 included in this
prospectus, and in the registration statement of which this prospectus forms a
part, have been audited by Grant Thornton LLP, an independent registered public
accounting firm, to the extent and for the period set forth in their report
appearing elsewhere herein and in the registration statement, and are included
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
The
validity of the issuance of the common stock offered hereby will be passed upon
for us by Gersten Savage LLP, 600 Lexington Avenue, New York, New York 10022,
included in the opinion letter filed as an exhibit to the registration statement
of which this prospectus forms a part. Jay M. Kaplowitz a partner of Gersten
Savage LLP, serves as a director of our Company.
No expert
or counsel named in this prospectus as having prepared or certified any part of
this prospectus or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis or had, or
is to receive, in connection with the offering, a substantial interest, directly
or indirectly, in our Company, nor was any such expert
connected with us as a promoter, managing or principal underwriter, voting
trustee, director, officer or employee.
BUSINESS
OVERVIEW
Founded
in 1987, we are a developer of mobility appliance software solutions primarily
for the Research In Motion® (RIM) BlackBerry market. We design and
integrate our software into specialized server appliances targeted at the
Federal Government and in particular, the Department of Defense (“DoD”), public
sector, commercial, and remote hosting customers.
Until
July 2009, we offered computer integration solutions for the federal
marketplace and Independent Software Vendors. In July 2009, we
entered into an Asset Purchase Agreement with NCS Technologies, Inc., a Virginia
corporation (“NCS”), pursuant to which we agreed to sell to NCS, and NCS agreed
to purchase from us, all of our right, title and interest in and to the assets
relating to our computer integration business. Further, in July
2009 our management and Board of Directors determined to shift the focus of our
operations, resources and investments to our BlackBerry-related technologies and
products.
RECENT
DEVELOPMENTS
November
Line of Credit and Note Payable
On
November 3, 2009, we entered into a Line of Credit and Security Agreement (the
“Credit and Security Agreement”) with Caledonia Capital Corporation, a Delaware
corporation (the “Lender”) pursuant to which the Lender agreed to extend to us a
revolving line of credit in the amount of $150,000, in the form of a Revolving
Line of Credit Promissory Note (the “Credit Note”). The Credit Note
bears interest at a rate of 15% per annum, and is payable in monthly
installments commencing 30 days after November 3, 2009, which was the date when
we issued the Credit Note. The principal amount of the Credit Note,
together with interest accrued and unpaid thereon and all other sums due, shall
be due and payable in full upon the earlier to occur of (a) March 31, 2010, or
(b) the date we shall have raised a total of not less than $1,000,000 in capital
invested in our equity which is accompanied by our issuing shares of stock which
were not trading in the public markets prior to the date of the Credit Note
(“New Equity Capital”). There are no penalties for early
prepayment of the Credit Note.
The
Credit Note is a revolving line of credit note. Principal advances
may be made, from time to time, by the Lender up to the principal amount of the
Credit Note, and principal payments may be made, from time to time by us to
reduce the principal balance owing pursuant to the Credit Note.
Our
obligations under the Credit and Security Agreement and the Credit Note are
secured by a lien in and to all of our rights, title and interest in and to its
furniture, fixtures, equipment, supplies, receivables, intangibles, and
inventory, together with all present and future substitutions, replacements and
accessories thereto and all present and future proceeds and products thereof, in
any form whatsoever (the “Collateral”).
14
Pursuant
to the Credit and Security Agreement, in the event that (a) we fail to pay when
due any principal, interest or other sum owing on any of the obligations
described in the Agreement when due; (b) we fail to perform any other covenant
or agreement in the Agreement, in the Warrant or in any of the other loan
documents and such default continues uncorrected for a period of thirty (30)
days after written notice of such default from the Lender to us; (c) if any
warranty or representation that we made to the Lender shall be untrue or
misleading in any material respect; (d) if a trustee or receiver is appointed
for us or for all or a substantial part of our assets; or if we make a general
assignment for the benefit of creditors; or if we file for bankruptcy; or if an
involuntary bankruptcy petition is filed against us and such petition is not
dismissed within forty-five (45) days after the filing of the same; (e) if any
property that we pledged or hypothecated to Lender, or any deposit account held
by Lender, is levied upon or attached or further encumbered, or garnished or the
Collateral shall otherwise be impaired and same is not removed within thirty
(30) days after written notice thereof from Lender us, as determined by Lender;
(f) if there occurs any material adverse change in our financial condition or
value of the Collateral, as determined by Lender; (g) if a final judgment is
entered against us, and the same is not discharged, appealed (provided such
appeal stays such judgment) or satisfied within thirty (30) calendar days; (h)
if we are liquidated or dissolved; or (i) a default shall occur under that
certain Note in the original principal amount of $250,000 from SteelCloud to
Lender dated July 1, 2009, then the
Lender may, without any further notice or demand, (1) declare any or all
of the obligations not already due to be immediately due and payable; (2)
enforce, by any proceedings or otherwise, any of the obligations; (3) take
exclusive possession of any or all of the Collateral, (4) enforce any liens or
security interests securing the obligations; (5) demand, compromise, collect,
sue for and receive any money or property at any time due, (6) endorse
SteelCloud name on any promissory notes or other instruments, checks, drafts,
money orders or other items of payment constituting Collateral, or collections
or other proceeds of Collateral, that may come into Lender's possession or
control from time to time; and/or (7) terminate, or cease extending credit
under, any or all outstanding commitments or credit accommodations of Lender to
SteelCloud.
As an
inducement to the Lender to make the loan, we agreed to issue to the Lender a
warrant (the “Credit Warrant”) to purchase 2.5 shares of our common stock for
every dollar we borrow pursuant to the Credit and Security
Agreement. The Credit Warrant is exercisable for four years at an
exercise price of $0.25 per share. The exercise price may be adjusted
in the event of any stock dividend, stock split, stock combination,
reclassification or similar transaction. Additionally, our Board of Directors
(the “Board”) has the discretion to reduce the then-current exercise price to
any amount at any time during the term of the Warrant for any period of time the
Board deems appropriate. We have agreed to prepare and file a
registration statement for the purposes of registering the resale of the shares
of common stock underlying the Credit Warrant, commencing on or about December
31, 2009.
On
November 4, 2009, we borrowed $60,000 pursuant to the Credit and Security
Agreement and the Credit Note, and issued to the Lender a Credit Warrant to
purchase up to 150,000 shares of our common stock pursuant to the Credit and
Security Agreement. On November 23, 2009, we borrowed the additional
$90,000 pursuant to the Credit and Security Agreement and the Credit Note, and
issued to the Lender a Credit Warrant to purchase up to 225,000 shares of our
common stock.
Sale
of Integration Business
On July
10, 2009, we entered into an Asset Purchase Agreement (the “Agreement”) with NCS
Technologies, Inc., a Virginia corporation (referred to herein as “NCS”),
pursuant to which we agreed to sell to NCS, and NCS agreed to purchase from us,
all of our right, title and interest in and to the assets relating to our
computer integration business. The purchase price was $475,000
of which $150,000 was paid as a deposit and the remaining $325,000 is an
earn-out amount, which is payable from and to the extent of revenue NCS receives
during the three-year period after the closing date from certain existing and
prospective clients, at a rate equal to 15% of the net sales price received by
NCS from such clients. Any payments by NCS to us are due on or before
the 10th
business day following the month in which NCS receives the payments from the
client(s).
We have
classified the integration business as discontinued operations for the three and
nine month periods ending July 31, 2009 as well as all comparative periods
presented. Certain amounts have been reclassified in order to conform
to current period presentation.
July
Loan and Note Payable
On
July 1, 2009, we entered into a Business Loan and Security Agreement (the
“Agreement”) with Caledonia Capital Corporation, a Delaware Corporation
(referred to herein as the “Lender”) pursuant to which the Lender agreed to
lend us $250,000 in the form of a Secured Promissory Note (the “Note”) which was
issued on July 1, 2009. The Note
originally provided for a maturity date of December 29, 2009 (the “Maturity
Date”) and an annual interest rate of 15%. The Note was amended on
December 29, 2009 to provide that (a) the annual interest rate of the Note is
20%, (b) accrued interest under the Note shall be payable in monthly
installments commencing February 1, 2010, and continuing on the first business
day of each successive month, and (c) the Maturity Date is March 31,
2010. There are no penalties for early prepayment of the
Note.
In the
event that any installment of principal and/or interest due under the Note is
not received by the Lender within ten (10) days after the date when the same is
due, then we shall be required to pay a late charge of 5.0% of such
installment.
Additionally,
in the event that we receive investments from one or more investors in one or
more transactions in an aggregate amount in excess of $750,000, whether in the
form of cash, negotiable or non-negotiable instruments or any form of payment in
exchange for the issuance of any certificated or non-certificated security,
whether in the form of debt or equity (an “Equity Raise”), at any time between
the Issuance Date and the Maturity Date, shall be required, within five (5)
business days after the Equity Raise first exceeds $750,000, to curtail the
accrued interest and outstanding principal balance of the Note by an amount
equal to the amount by which the Equity Raise then exceeds $750,000 (but in no
event by more than the then outstanding principal balance and interest accrued
on the Note). Until delivery of such funds to the Lender, all such funds shall
be deemed held in trust by us for and on behalf of the Lender. All
funds that we deliver to the Lender from the Equity Raise shall be deemed
prepayments of the Note.
Pursuant
to the Agreement and the Note, our obligations thereunder are secured by a first
priority lien in and to all of our intellectual property rights, title and
interest in and to the SteelWorks® Mobile integrated server appliance
software.
As an
inducement to the Lender to make the loan, we issued to the Lender a warrant to
purchase up to 625,000 shares of our common stock, par value $0.001 per
share. The Warrant is exercisable for four years at an exercise price
of $0.15 per share. We determined fair value of these warrants
utilizing the Black-Sholes method. The fair value of these warrants
at issuance date was approximately $130,000. As an inducement for the
Lender to amend the terms of the Note, we agreed to pay the Lender
$25,000.
Board
of Directors Investment
On June
15, 2009, we sold an aggregate of 350,000 shares of our common stock, $.001 par
value, to our seven directors, for aggregate cash proceeds of $87,500.
The shares of common stock were sold at $0.25 per share, or $.01 higher
than the closing price of the common stock on the date of sale. Each
share of common stock is accompanied by one warrant to purchase one additional
share of common stock (the “Warrant”). The Warrants are exercisable
for five years from the date of issuance at an exercise price of $0.25 per
share. The seven directors entered into lock-up agreements with
us, restricting their ability to exercise the warrants until we receive
shareholder approval for the issuance of the Warrants. We received
shareholder approval for the issuance on October 23, 2009.
15
BLACKBERRY®
ENTERPRISE SERVER SOLUTION (STEELWORKS®)
As an
extension of our business, we developed SteelWorks® Mobile (“SteelWorks
Mobile”), an appliance solution specifically for the BlackBerry Enterprise
Server (“BES”). SteelWorks Mobile was developed in conjunction with
Research in Motion (“RIM”). SteelWorks Mobile is an integrated
server appliance that enables virtually any size organization to implement BES
at a fraction of the cost, time, and resource commitment. We have
filed for patent protection for the SteelWorks Mobile technology we created for
the installation wizard, backup and restore features. These patents are
currently pending approval from the U.S. Patent and Trademark
Office.
In
addition, we developed SteelWorks FedMobile, our BlackBerry Enterprise Server
appliance solution specifically for the Department of Defense (“DoD”) and other
related agencies. The SteelWorks FedMobile appliance builds upon
SteelWorks Mobile by automating the application of the Defense Information
Systems Agency’s Security Technical Implementation Guides (“STIGs”) to the BES
installation process. STIGs mandate the policies for which the DoD
and related agencies must operate their wireless communications. As a
result, our SteelWorks FedMobile appliance allows DoD organizations to implement
a STIG compliant BES infrastructure in a fraction of the time, cost, or
resources necessary to what is otherwise a time intensive and manual STIG
process.
PROFESSIONAL
SERVICES
We
provide information technology (“IT”) consulting and contract staffing solutions
for our commercial and government clients. Our consultants are
subject matter experts in network infrastructure complexities and security
technologies including firewalls, content inspection, intrusion detection, spam
and vulnerability scanning. For our contract staffing solutions, our
personnel function as “virtual” employees, performing work directly under the
auspices of client management and serve as an extension of the client’s in-house
staff resources.
RESEARCH
AND PRODUCT DEVELOPMENT
By
investing in product development, we believe we will have more control over the
functionality and marketing of our products. We also believe that the
resulting intellectual property will increase the competitiveness of our
offerings and improve product margins. For the three and nine months
ended July 31, 2009, we incurred research and development costs of approximately
$54,000 and $152,000, respectively. We will continue to incur costs
for product development in the future.
MARKETING
We market
our products and services to government and commercial users through sales
channels that include distributors, integrators and value added
resellers. We primarily market to the sales channel organizations
instead of the end users. We use an in-house sales force and program
managers to market our products and services. Our products and
services are marketed worldwide. We maintain an Internet website
containing our product offerings located at www.steelcloud.com.
JOINT
VENTURE
In
October 2008, we created a joint venture in the United Arab Emirates (UAE)
region with XSAT SteelCloud MEA, LLC (Middle East, Africa) the newly formed
joint venture company, is jointly owned, 20% by XSAT and 80% by
SteelCloud. Under the terms of the joint agreement, XSAT will provide
a local presence for our products to its customers within the UAE
region. XSAT will also provide warranty and support for the products
sold within that region.
16
COMPETITION
Our
products assist organizations with the installation and maintenance of their
BlackBerry network environment. Our products provide the end user
base with an alternative means to perform the installation and maintenance
process. There are currently no other products available in the
marketplace that compete with SteelWorks® Mobile or SteelWorks
FedMobile.
Our main
source of competition is from individuals within organizations who choose to
install and maintain their BlackBerry network environment internally and without
the aid of our products.
Management
believes that it maintains a strong relationship with Research in Motion
(“RIM”), the maker of the BlackBerry line of products. Management
further believes that our relationship with RIM may be a barrier to entry for
other organizations that may seek to enter into this market.
SUPPLIERS
We devote
significant resources to establishing and maintaining relationships with key
suppliers. We have recently executed an Original Equipment
Manufacturer partnership agreement with Dell, Inc. (“Dell”) to supply SteelWorks
Mobile and SteelWorks FedMobile on their network servers. SteelWorks
Mobile and SteelWorks FedMobile will be manufactured and produced by
Dell. In addition, Dell will supply the logistics and warranty
support for the hardware. Dell will be the primary vendor for
SteelWorks Mobile and SteelWorks FedMobile, however, we intend to maintain
relationships with multiple vendors to manufacture and produce our products
should the need arise.
PATENTS,
TRADEMARKS AND LICENSES
We work
closely with computer product suppliers and other technology developers to stay
abreast of the latest developments in computer technology. While we
do not believe our continued success depends upon the rights to a patent
portfolio, there can be no assurance that we will continue to have access to
existing or new technology for use in our products.
On March
20, 2008, we were issued patent 3,396,156 titled ”SteelWorks.”
On
September 15, 2008, we were issued community trademark Registration 006430359
(European); Japan #948064 (International), Canada Application Approval titled
“SteelRestore.”
On
October 21, 2008, we were issued patent 3,521,899 titled “Sure
Audit.”
We
conduct our business under the trademarks and service marks of “SteelCloud,”
“SteelCloud Company” and “Dunn Computer Corporation.” We believe our
copyrights, trademarks and service marks have significant value and are an
important factor in the marketing of our products.
17
GOING
CONCERN
We have
had recurring annual operating losses since our fiscal year ended October 31,
2004. We expect that such losses will continue at least until our
fiscal year ending October 31, 2010. The report of our independent
registered public accounting firm on our consolidated financial statements for
the fiscal year ended October 31, 2008 contains an explanatory paragraph
regarding our ability to continue as a going concern based upon our history of
net losses. We are dependent upon available cash and operating cash flow
to meet our capital needs. We are considering all strategic options
to improve our liquidity and provide us with working capital to fund our
continuing business operations which include equity offerings, asset sales or
debt financing as alternatives to improve our cash needs; however, there can be
no assurance that we will be successful in negotiating financing on terms
agreeable to us or at all. If adequate funds are not available or are
not available on acceptable terms, we will likely not be able to take advantage
of unanticipated opportunities, develop or enhance services or products, respond
to competitive pressures, or continue as a going concern. There is no
assurance we will be successful in raising working capital as
needed. Further, there are no assurances that we will have sufficient
funds to execute our business plan, pay our operating expenses and obligations
as they become due or generate positive operating results.
We are in
the process of executing on several restructuring initiatives which
include:
|
•
|
Obtaining additional capital
through debt and/or equity;
|
|
•
|
Further reducing our operating
costs; and
|
|
•
|
Reduction of occupancy
costs.
|
While we
believe that these initiatives will better align our costs with our anticipated
revenues going forward, it will take time for these initiatives to have an
impact on our net revenue and operating income.
Employees
As of
October 31, 2008, and December 28, 2009, we had 48 and 15 employees,
respectively. None of our employees are covered by a collective
bargaining agreement and we consider our relationships with our employees to be
good.
We
believe our future success depends in large part upon our continued ability to
attract and retain highly qualified management, technical, and sales
personnel. We have an in-house training and mentoring program to
develop our own supply of highly qualified technical support
specialists. There can be no assurance, however, that we will be able
to attract and retain the qualified personnel necessary for our
business.
Principal
Executive Offices
Our
principal executive offices are located at 13962 Park Center Road Herndon,
Virginia 20171. Our telephone number is (703) 674-5500, fax
number is (703) 450-0407 and our website address is www.steelcloud.com. The
information on our website is not incorporated by reference into this prospectus
and should not be relied upon with respect to this offering.
DESCRIPTION
OF PROPERTY
We lease
approximately 24,000 square feet of office space in Herndon,
Virginia. Our monthly rent expense is approximately
$21,000.
LEGAL
PROCEEDINGS
On May
22, 2009, we entered into a Stipulation/Consent Order with CRP (the
“Stipulation”), pursuant to an Affidavit and Statement of Account (the
“Affidavit”), stating, as declared by a general manager of Jones Lang LaSalle, a
property management company and agent for CRP Holdings A-1, LLC (“CRP”), the
landlord of 14040 Park Center Road, Suite 210, Herndon, Virginia 20171 (the
“Premises”), that CRP, as landlord, was seeking a judgment against us for: (i)
possession of the Premises, and (ii) monetary damages for nonpayment of rent due
under a sublease, dated September 28, 2004, by and between us and NEC America,
Inc. (“NEC”) (the “Sublease”), and a subsequent assignment of the Sublease to
CRP from NEC, dated December 15, 2008. In the Stipulation we
acknowledged that the balance due for rent and additional rent for the Premises
was $168,637.96, together with attorney’s fees and court expenses of $7,041.00
through May 22, 2009 (the “Judgment Amount”). Pursuant to the
Stipulation, we paid $30,000 (the “Forbearance Payment”) on May 22, 2009 toward
the Judgment Amount. Further we agreed to, and have, vacated the
Premises. CRP agreed to stay enforcement of the Judgment Amount until
the earlier of (a) our receipt of capital in the amount of at least $500,000, or
(b) May 31, 2010. The matter was returned to the court’s files
pending our compliance with the terms of the
Stipulation.
18
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
Market
Information
Prior to
the quotation of our common stock beginning on April 22, 1997, there was no
established trading market for our common stock. Our common stock is
listed on The NASDAQ Stock Market, Inc.’s Capital Market. We changed
our symbol from “DNCC” to “SCLD” on October 19, 2000.
The
following table sets forth the high and low selling prices as reported on the
NASDAQ Capital Market for each fiscal quarter during the fiscal years ended
October 31, 2008 and 2007, as well as for the first, second, third and
fourth quarters of fiscal 2009 through September 8, 2009. These
quotations reflect inter-dealer prices without retail mark-up, markdown, or
commission and may not represent actual transactions.
Fiscal 2007
|
||||||||
High
|
Low
|
|||||||
First
Quarter
|
$
|
1.34
|
$
|
0.61
|
||||
Second
Quarter
|
$
|
1.47
|
$
|
0.94
|
||||
Third
Quarter
|
$
|
1.74
|
$
|
1.12
|
||||
Fourth
Quarter
|
$
|
1.68
|
$
|
1.12
|
Fiscal 2008
|
||||||||
High
|
Low
|
|||||||
First
Quarter
|
$
|
1.25
|
$
|
0.87
|
||||
Second
Quarter
|
$
|
1.21
|
$
|
0.80
|
||||
Third
Quarter
|
$
|
1.58
|
$
|
1.06
|
||||
Fourth
Quarter
|
$
|
1.26
|
$
|
0.56
|
Fiscal 2009
|
||||||||
High
|
Low
|
|||||||
First
Quarter
|
$
|
0.75
|
$
|
0.30
|
||||
Second
Quarter
|
$
|
0.38
|
$
|
0.14
|
||||
Third
Quarter
|
$
|
0.48
|
$
|
0.15
|
||||
Fourth
Quarter
|
$
|
0.66
|
$
|
0.20
|
Fiscal
2010
|
||||||||
High
|
Low
|
|||||||
First
Quarter (through December 28, 2009)
|
$
|
0.39
|
$
|
0.20
|
On
December 28, 2009, the closing price of our common stock as reported on the
NASDAQ Capital Market was $0.29 per share. There were approximately
5,100 shareholders of our common stock as of such date.
Dividend
Policy
We have
not paid cash dividends on our common stock and do not intend to do so in the
foreseeable future.
19
Equity
Compensation Plan Information
The
following table sets forth the number of securities to be issued upon the
exercise of outstanding options, warrants and rights which were issued pursuant
to our equity compensation plans as of October 31, 2008.
Plan category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in column (a)) 2
|
|||||||||
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
compensation plans approved by security holders 1
|
2,049,166
|
$
|
1.20
|
1,859,809
|
||||||||
Equity
compensation plans not approved by security holders
|
||||||||||||
Total
|
2,049,166
|
$
|
1.20
|
1,859,809
|
|
1
|
Descriptions of our equity
compensation plans can be found in Note 10 “Stock-Based Compensation” of
the Footnotes to our Annual Consolidated Financial Statements for the
fiscal year ended October 31,
2008.
|
|
2
|
In addition to being available
for future issuance upon exercise of options that may be granted after
October 31, 2008, all of the remaining 1,433,334 shares under our Amended
2007 Stock Option and Restricted Stock Plan, or the 2007 Option and
Restricted Stock Plan, may instead be issued in the form of restricted
stock.
|
NASDAQ
On
March 23, 2009, we received notice, under NASDAQ Marketplace Rule 4310(c)(3),
that our common stock was subject to potential delisting from the NASDAQ Capital
Market because we did not meet the criteria of NASDAQ Listing Rule 5550(b) (the
“Rule”) and did not have a minimum of $2,500,000 in stockholders’ equity,
$35,000,000 market value of listed securities, or $500,000 of net income from
continuing operations for the most recently completed fiscal year or two of the
three most recently completed fiscal years. We provided NASDAQ with a
specific plan of how we intend to achieve and sustain compliance with all the
NASDAQ Capital Market listing requirements, including a time frame for
completion of such plan. Our plan includes the following two
strategies: (i) increasing our stockholders equity in excess of the minimum
$2,500,000 requirement by raising between $3,000,000 to $4,000,000 through an
equity transaction; and (ii) identifying a strategic partner interested in
either merging with or acquiring us. On April 28, 2009 we received
notice from NASDAQ indicating that NASDAQ had granted our request for an
extension of time to regain compliance with the Rule. Pursuant to the
terms of the extension, we were required to: (a) on or before July 6, 2009,
complete an equity transaction or a merger and/or acquisition, and (b) make
appropriate disclosures to the SEC and Nasdaq on a Form
8-K. We were not able to complete an equity transaction
or a merger and/or acquisition by July 6, 2009, and on July 8, 2009, we received
written notification from NASDAQ stating that we did not meet the terms of the
extension, and that, as a result, our common stock would be subject to
suspension from trading at the opening of business on July 17, 2009, and
delisted from NASDAQ. The notification stated that a hearing request
made to the NASDAQ Hearing Panel (the “Panel”) to appeal the determination would
stay the delisting of our common stock pending the Panel’s
decision. On July 15, 2009, we requested a hearing to appeal the
determination before the Panel and to present our plan for regaining compliance
with the Rule (the “Appeal”). On August 4, 2009, we received notice
that NASDAQ received our Appeal, and that the delisting action has been stayed,
pending a final written decision by the Panel after an oral/written hearing (the
“Hearing”), where we were required to demonstrate our ability to regain and
sustain compliance with the Rule. The Hearing took place at 11:00
A.M. EST, on September 3, 2009. On October 5, 2009, we received notice
that the Panel has granted our request for continued listing, subject to our
evidencing, on or before January 4, 2010 compliance with the
Rule.
On
September 15, 2009 we received notice from NASDAQ, under Marketplace Rule
5450(a)(1), that our common stock is subject to potential delisting from the
NASDAQ Capital Market because the bid price of our common stock closed
below the minimum $1.00 requirement for 30 consecutive business days prior
to September 15, 2009. We have been granted an initial 180 calendar
days, or until March 15, 2010 to regain compliance.
20
FINANCIAL
STATEMENTS
Annual
Financial Statements
SteelCloud,
Inc. (a Virginia Corporation)
|
||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets as of October 31, 2007 and 2008
|
F-2
|
|
Consolidated
Statements of Operations for the two years ended October 31,
2008
|
F-3
|
|
Consolidated
Statements of Stockholders' Equity for the two years ended October 31,
2008
|
F-4
|
|
Consolidated
Statements of Cash Flows for the two years ended October 31,
2008
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
Interim
Financial Statements
Condensed
Consolidated Balance Sheet
|
F-22
|
|
Unaudited
Condensed Consolidated Statements of Operations
|
F-23
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
|
F-24
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
F-25
|
21
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
SteelCloud,
Inc.
We have
audited the accompanying consolidated balance sheets of SteelCloud, Inc. (a
Virginia Corporation) and subsidiaries (the Company) as of October 31, 2008 and
2007, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the two years in the period ended October 31,
2008. Our audits of the basic financial statements included the
financial statement schedule listed in the index appearing under Item 15 (a)
2. These financial statements and financial statement schedule are
the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit 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 the Company as of October
31, 2008 and 2007, and the results of its operations and its cash flows for each
of the two years in the period ended October 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1, the Company
incurred a net loss of $2,759,562 during the year ended October 31, 2008, and,
as of that date, the Company had an accumulated deficit of $44,868,564 and
working capital of $1,680,645. These factors, among others, as
discussed in Note 1 to the consolidated financial statements, raise substantial
doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Grant
Thornton LLP
McLean,
Virginia
January
29, 2009
F-1
STEELCLOUD,
INC.
CONSOLIDATED
BALANCE SHEETS
OCTOBER 31,
|
||||||||
2007
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
2,622,654
|
$
|
752,351
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $40,000 and $36,000
as of October 31, 2007 and 2008, respectively
|
2,625,372
|
1,571,673
|
||||||
Inventory,
net
|
1,178,395
|
521,920
|
||||||
Prepaid
expenses and other current assets
|
255,924
|
130,446
|
||||||
Deferred
contract costs
|
83,753
|
-
|
||||||
Total
current assets
|
6,766,098
|
2,976,390
|
||||||
Property
and equipment, net
|
802,288
|
626,440
|
||||||
Equipment
on lease, net
|
323,904
|
442,099
|
||||||
Other
assets
|
44,053
|
7,020
|
||||||
Total
assets
|
$
|
7,936,343
|
$
|
4,051,949
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
1,789,329
|
$
|
718,316
|
||||
Accrued
expenses
|
1,158,641
|
561,009
|
||||||
Notes
payable, current portion
|
12,842
|
7,538
|
||||||
Unearned
revenue
|
98,255
|
8,882
|
||||||
Total
current liabilities
|
3,059,067
|
1,295,745
|
||||||
Notes
payable, long-term portion
|
15,442
|
7,903
|
||||||
Other
|
154,520
|
132,055
|
||||||
Total
long-term liabilities
|
169,962
|
139,958
|
||||||
Stockholders’
equity:
|
||||||||
Preferred
stock, $.001 par value; 2,000,000 shares authorized, 0 and 0 shares issued
and outstanding at October 31, 2007 and 2008, respectively
|
-
|
-
|
||||||
Common
stock, $.001 par value; 50,000,000 shares authorized 14,716,934
and 15,138,376 shares issued at October 31, 2007
and 2008, respectively
|
14,717
|
15,138
|
||||||
Additional
paid-in capital
|
50,234,099
|
50,902,172
|
||||||
Treasury
stock, 400,000 shares at October 31, 2007 and 2008,
respectively
|
(3,432,500
|
)
|
(3,432,500
|
)
|
||||
Accumulated
deficit
|
(42,109,002
|
)
|
(44,868,564
|
)
|
||||
Total
stockholders’ equity
|
4,707,314
|
2,616,246
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
7,936,343
|
$
|
4,051,949
|
See
accompanying notes.
F-2
STEELCLOUD,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER
31,
|
||||||||
2007
|
2008
|
|||||||
Products
|
$
|
21,421,129
|
$
|
16,333,600
|
||||
Services
|
1,894,551
|
2,685,296
|
||||||
Net
revenues
|
23,315,680
|
19,018,896
|
||||||
Products
|
17,064,855
|
13,764,101
|
||||||
Services
|
1,305,604
|
2,159,753
|
||||||
Costs
of revenues
|
18,370,459
|
15,923,854
|
||||||
Gross
profit
|
4,945,221
|
3,095,042
|
||||||
Selling
and marketing
|
1,614,817
|
1,259,416
|
||||||
General
and administrative
|
4,315,254
|
3,901,499
|
||||||
Research
and product development
|
661,550
|
702,231
|
||||||
Severance
and restructuring
|
317,548
|
-
|
||||||
Loss
from operations
|
(1,963,948
|
)
|
(2,768,104
|
)
|
||||
Other
income (expense):
|
||||||||
Interest
income
|
46,458
|
26,912
|
||||||
Interest
expense
|
(27,105
|
)
|
(18,370
|
)
|
||||
Net
loss attributable to common stockholders
|
$
|
(1,944,595
|
)
|
$
|
(2,759,562
|
)
|
||
Loss
per share, basic and diluted:
|
||||||||
Net
loss per share
|
$
|
(0.14
|
)
|
$
|
(0.19
|
)
|
See
accompanying notes.
STEELCLOUD,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Treasury
|
Accumulated
|
||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Stock
|
Deficit
|
Total
|
|||||||||||||||||||||||||
Balance
at October 31, 2006
|
–
|
–
|
14,662,176
|
$
|
14,662
|
$
|
49,834,658
|
$
|
(3,432,500
|
)
|
$
|
(40,164,407
|
)
|
$
|
6,252,413
|
|||||||||||||||||
Issuance
of common stock in connection with employee stock purchase plan
exercises
|
–
|
–
|
33,254
|
33
|
16,037
|
–
|
–
|
16,070
|
||||||||||||||||||||||||
Stock
compensation expense
|
–
|
–
|
–
|
–
|
322,136
|
–
|
–
|
322,136
|
||||||||||||||||||||||||
Issuance
of warrants in conjunction with the retainage of a financial services
firm
|
–
|
–
|
–
|
–
|
40,000
|
–
|
–
|
40,000
|
||||||||||||||||||||||||
Issuance
of common stock to the Company’s board of directors
|
–
|
–
|
21,504
|
22
|
21,268
|
–
|
–
|
21,290
|
||||||||||||||||||||||||
Net
(loss)
|
–
|
–
|
–
|
–
|
–
|
–
|
(1,944,595
|
)
|
(1,944,595
|
)
|
||||||||||||||||||||||
Balance
at October 31, 2007
|
–
|
–
|
14,716,934
|
14,717
|
$
|
50,234,099
|
$
|
(3,432,500
|
)
|
$
|
(42,109,002
|
)
|
$
|
4,707,314
|
||||||||||||||||||
Issuance
of common stock in connection with employee stock purchase plan
exercises
|
–
|
–
|
5,152
|
5
|
4,408
|
–
|
–
|
4,413
|
||||||||||||||||||||||||
Issuance
of common stock in connection with employee stock option plan
exercises
|
–
|
–
|
196,290
|
196
|
121,503
|
–
|
–
|
121,699
|
||||||||||||||||||||||||
Stock
compensation expense
|
–
|
–
|
–
|
–
|
368,032
|
–
|
–
|
368,032
|
||||||||||||||||||||||||
Issuance
of common stock in connection with exercise of warrants
|
–
|
–
|
220,000
|
220
|
118,580
|
–
|
–
|
118,800
|
||||||||||||||||||||||||
Issuance
of warrants in conjunction with the retainage of a investor relations
firm
|
–
|
–
|
–
|
–
|
55,550
|
–
|
–
|
55,550
|
||||||||||||||||||||||||
Net
(loss)
|
–
|
–
|
–
|
–
|
–
|
–
|
(2,759,562
|
)
|
(2,759,562
|
)
|
||||||||||||||||||||||
Balance
at October 31, 2008
|
–
|
–
|
15,138,376
|
15,138
|
$
|
50,902,172
|
$
|
(3,432,500
|
)
|
$
|
(44,868,564
|
)
|
$
|
2,616,246
|
F-4
STEELCLOUD,
INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER
31,
|
||||||||
2007
|
2008
|
|||||||
Operating
activities
|
||||||||
Net
loss
|
$
|
(1,944,595
|
)
|
$
|
(2,759,562
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Stock
based compensation
|
343,426
|
368,032
|
||||||
Depreciation
and amortization of property and equipment
|
578,920
|
482,294
|
||||||
Warrant
based expense
|
40,000
|
55,550
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable, net
|
1,116,751
|
1,053,699
|
||||||
Inventory
|
6,674
|
656,475
|
||||||
Prepaid
expenses and other assets
|
61,862
|
162,511
|
||||||
Deferred
contract costs
|
133,741
|
83,753
|
||||||
Accounts
payable
|
(850,017
|
)
|
(1,071,013
|
)
|
||||
Accrued
expenses
|
(224,490
|
)
|
(613,001
|
)
|
||||
Unearned
revenue
|
(72,021
|
)
|
(96,469
|
)
|
||||
Net
cash used in operating activities
|
(809,749
|
)
|
(1,677,731
|
)
|
||||
Investing
activities
|
||||||||
Purchase
of property and equipment
|
(223,494
|
)
|
(424,641
|
)
|
||||
Net
cash used in investing activities
|
(223,494
|
)
|
(424,641
|
)
|
||||
Financing
activities
|
||||||||
Proceeds
from exercise of common stock options
|
16,070
|
244,912
|
||||||
Payments
on notes payable
|
(15,336
|
)
|
(12,843
|
)
|
||||
Net
cash provided by financing activities
|
734
|
232,069
|
||||||
Net
decrease in cash and cash equivalents
|
(1,032,509
|
)
|
(1,870,303
|
)
|
||||
Cash
and cash equivalents at beginning of year
|
3,655,163
|
2,622,654
|
||||||
Cash
and cash equivalents at end of year
|
$
|
2,622,654
|
$
|
752,351
|
||||
Supplemental
cash flow information
|
||||||||
Interest
paid
|
$
|
27,105
|
$
|
18,370
|
||||
Income
taxes paid
|
-
|
-
|
See
accompanying notes
F-5
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2007 AND 2008
1.
|
Organization
|
Founded
in 1987, SteelCloud, Inc. (the “Company” or “SteelCloud”) is a leading
manufacturer of embedded integrated computing systems solutions for the federal
marketplace and Independent Software Vendors (“ISV(s)”). The Company
designs, manufactures and integrates specialized servers for federal market
prime contractors (“federal integrators”) and Independent Software Vendors
(ISVs) who use the specialized servers to deliver software application to their
clients.
SteelCloud
was originally incorporated as Dunn Computer Operating Company on July 27,
1987 under the laws of the Commonwealth of Virginia. On February 26,
1998, Dunn Computer Corporation ("Dunn") was formed and incorporated in the
Commonwealth of Virginia to become a holding company for several entities
including Dunn Computer Operating Company. The Company's subsidiary
is International Data Products ("IDP"), acquired in May 1998. On May
15, 2001, the shareholders approved an amendment to the Company’s articles of
incorporation to change the corporate name from Dunn Computer Corporation to
SteelCloud, Inc. On December 31, 2003, Dunn was merged with
and into SteelCloud. On February 17, 2004, the Company acquired the
assets of Asgard Holding, LLC ("Asgard"). In July of 2006, as part of
its restructuring efforts, the Company closed its sales office and ceased all of
its operations in Florida. The Company’s former subsidiaries, Puerto
Rico Industrial Manufacturing Operations Acquisition Corporation (“PRIMO”), and
STMS Corporation (“STMS”), are inactive.
The
accompanying financial statements include the accounts of the Company and its
subsidiaries, International Data Products Corporation (“IDP”), Puerto Rico
Industrial Manufacturing Operations Acquisition Corporation (“PRIMO”), and STMS
Corporation (“STMS”). All intercompany accounts and activity have
been eliminated in the consolidation process.
Going
Concern
The
Company’s independent accountants stated in their report on the consolidated
financial statements of the Company for the year ended October 31, 2008 that the
Company has had recurring operating losses that raise substantial doubt about
its ability to continue as a going concern. For the year ended
October 31, 2008, the Company incurred a net loss of $2,759,562 and had an
accumulated deficit of $44,868,564 as of that date. The consolidated
financial statements do not include any adjustments related to the recovery and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue as
a going concern.
The
Company is dependent upon available cash and operating cash flow to meet its
capital needs. The Company is considering all strategic options to
improve its liquidity and provide it with working capital to fund its continuing
business operations which include equity offerings, assets sales or debt
financing as alternatives to improve its cash needs however, there can be no
assurance that it will be successful in negotiating agreeable financing terms or
at all. If adequate funds are not available or are not available on
acceptable terms, the Company will likely not be able to take advantage of
unanticipated opportunities, develop or enhance services or products, respond to
competitive pressures, or continue as a going concern. There is no
assurance the Company will be successful in raising working capital as
needed. There are no assurances that the Company will have sufficient
funds to execute its business plan, pay its operating expenses and obligations
as they become due or generate positive operating results.
The
Company is in the process of executing on several restructuring initiatives
which have occurred from late 2008 to the present that include:
|
•
|
A reorganization in
November 2008 that included personnel terminations from all parts of
the organization;
|
|
•
|
Sales of certain of the
Company’s leased assets to
customers;
|
|
•
|
Elimination of all non-essential
costs; and
|
|
•
|
Reduction of occupancy
costs.
|
While the
Company believes that these initiatives will better align its costs with its
anticipated revenues going forward, it will take time for these initiatives to
have an impact on its net revenue and operating income.
F-6
2.
|
Management Change, Restructuring
and Operations
|
In August
2007, the Company’s Board of Directors appointed Robert Frick as the Company's
Executive Director. The appointment was part of the transition plan
that the Company initiated in 2006 when Clifton Sink, was charged to lead the
Company to a return to profitability and an increased share
price. Also in August 2007, the Company entered into an Employment
Resignation Agreement with Cliff Sink pursuant to which Mr. Sink resigned his
positions as President and Chief Executive Officer and Board Member of the
Company effective November 1, 2007. On November 1, 2007, Mr. Frick
assumed all leadership responsibilities as President and Chief Executive Officer
of the Company and was appointed to the Board of Directors to fill the vacancy
created by Mr. Sink's resignation. The financial impact of the
Employment Resignation Agreement was recorded as a charge to operations of
approximately $318,000 in the Company’s fiscal 2007 fourth quarter.
3.
|
Significant Accounting
Policies
|
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Revenue
Recognition
The
Company recognizes revenue in accordance with Security and Exchange Commission
(“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition in Financial
Statements, corrected copy (“SAB 104”). Generally, SAB 104
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable: and (4) collectability
is reasonably assured.
Effective
for revenue arrangements entered into in fiscal periods beginning after June 15,
2003, the Company adopted Emerging Issues Task Force Issue No. 00-21, “ Revenue Arrangements with Multiple
Deliverables ” (“EITF 00-21”). Issued in December 2002 by the
Financial Accounting Standards Board (“FASB”), EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. This Issue addresses
when and, if so, how an arrangement involving multiple deliverables should be
divided into separate units of accounting. This Issue does not change
otherwise applicable revenue recognition criteria. In the event the
Company enters into a multiple element arrangement and there are undelivered
elements as of the balance sheet date, the Company assesses whether the elements
are separable and have determinable fair value in determining the amount of
revenue to record.
The
Company recognizes revenue associated with the resale of maintenance contracts
on a net basis in accordance with Emerging Issues Task Force Issue No 99-19, “
Reporting Revenue Gross as a
Principal versus Net as an Agent” (“EITF 99-19”), and interpretations
thereof.
Beginning
in June 2006, the FASB Emerging Issues Task Force reached a consensus on Issue
No. 06-03, "How Sales Taxes
Collected From Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement" ("EITF 06-03"). The Company
collects and remits sales and property taxes on products and services that it
purchases and sells under its contracts with customers, and reports such amounts
under the net method in its consolidated statements of
operations. Accordingly, there are no sales and property taxes
included in gross revenue.
The
Company derives its revenue from the following sources: product revenue,
information technology support services, software license as a reseller and
support revenue and software training and implementation revenue.
F-7
For
product sales where title transfers upon shipment and risk of loss transfers to
the customer, the Company generally recognizes revenue at the time of
shipment. For product sales where title and risk of loss transfers
upon destination, the Company generally recognizes revenue when products reach
their destination. Revenue from hardware leased to customers under
operating lease arrangements is recognized over the contract
term. When product and installation services that are not essential
to the functionality of the product are sold as part of a bundled agreement, the
fair value of the installation services, based on the price charged for the
services when sold separately, is deferred and recognized when the services are
performed. The products sold are generally covered by a warranty for
periods ranging from one to three years. The Company accrues an
estimated warranty reserve in the period of sale to provide for estimated costs
to provide warranty services.
In
October 2008 the Company began delivering its appliance solution specifically
developed for Blackberry Enterprise Servers (“BES”). This solution is
a bundled hardware-software system and subject to American Institute of
Certified Public Accountants’ Statement of Position (“SOP”) 97-2, “Software Revenue
Recognition,” as modified by SOP 98-9, “Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions.” The
software does not require significant modification and customization
services. The Company does not have vendor-specific objective
evidence (“VSOE”) of fair value for its software. Accordingly, when
the software is sold in conjunction with the Company’s hardware, software
revenue is recognized upon delivery of the hardware.
For
services revenue under time and material contracts, the Company recognizes
revenue as services are provided based on the hours of service at stated
contractual rates.
The
Company is a value-added solution provider for certain software
products. When resold software licenses, and related maintenance,
customization and training services are all provided together to an individual
customer the Company recognizes revenue for the arrangement after the Company
has delivered the software license and the customer has approved all
implementation and training services provided. In instances where the
Company only resells the software license and maintenance to the customer, the
Company recognizes revenue after the customer has acknowledged and accepted
delivery of the software. The software manufacturer is responsible
for providing software maintenance. Accordingly, revenue from
maintenance contracts is recognized upon delivery or acceptance, as the Company
has no future obligation to provide the maintenance services and no right of
return exists.
The
Company incurs shipping and handling costs, which are recorded in cost of
revenues.
Deferred
revenue includes amounts received from customers for which revenue has not been
recognized. This generally results from certain customer contracts,
ISV releases, warranties, hardware maintenance and support, and consulting
services. The deferred revenue associated with customer contracts and
ISV releases represents payments received for milestones achieved prior to
recognition of revenue. This revenue will be recognized as products
are shipped. Revenues from warranties and hardware maintenance and
support are recognized ratably over the service term selected by the
customer. Deferred service revenues from consulting are recognized as
the services are performed.
Significant
Customers
During
fiscal year 2008, contracts with two customers, a Federal Integrator and a
Commercial Customer, represented $9.5 million and $1.9 million respectively of
our net revenues or 50% and 10% of total net revenues, respectively, for the
fiscal year 2008. Given the nature of the products manufactured by us
as well as the delivery schedules established by our partners, revenue and
accounts receivable concentration by any single customer will fluctuate from
year to year. Future revenues and results of operations could be
adversely affected should these customers reduce their purchases, eliminate
product lines or choose not to continue to buy products and services from
us.
Equity-Based
Compensation
The
Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), “ Share-Based
Payment ” (“SFAS 123R”) on November 1, 2005. Issued in
December 2004, SFAS 123R requires that the fair value compensation cost relating
to share-based payment transactions be recognized in financial
statements. Under the provisions of SFAS 123R, share-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized over the employee’s requisite service
period. The fair value of the Company’s stock options and employee
stock purchase plan (“ESPP”) awards was estimated using a Black-Scholes option
valuation model. This model requires the input of highly subjective
assumptions and elections in adopting and implementing SFAS 123R, including
expected stock price volatility and the estimated life of each
award. The fair value of equity-based awards is amortized over the
vesting period of the award and the Company has elected to use the straight-line
method for amortizing its stock option and ESPP awards. The Company
adopted the modified prospective transition method as provided by SFAS 123R and
compensation costs for all awards granted after the date of adoption and the
unvested portion of previously granted awards outstanding are measured at their
estimated fair value.
F-8
Other
Equity-Based Compensation
The
Company accounts for equity instruments issued in exchange for the receipt of
goods or services from other than employees and non-employee directors in
accordance with SFAS No. 123R, and the conclusions reached by the Emerging
Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring or in Conjunction with
Selling, Goods or Services” (“EITF 96-18”). Costs are measured
at the estimated fair market value of the consideration received or the
estimated fair value of the equity instruments issued, whichever is more
reliably measurable. The value of equity instruments issued for
consideration other than employee services is determined on the earlier of a
performance commitment or completion of performance by the provider of goods or
services as defined by EITF 96-18. Stock-based compensation
recognized under SFAS No. 123 and EITF 96-18 for services from non-employees was
$40,000 and $55,550 during the fiscal years ended October 31, 2007 and 2008,
respectively.
Income
Taxes
The
Company recognizes deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of certain assets and liabilities. A valuation allowance is
established, as necessary, to reduce deferred income tax assets to an amount
expected to be realized in future periods. The Company determines its
valuation allowance pursuant to the provisions of SFAS No. 109, “Accounting for Income Taxes”
, which requires the Company to weigh all positive and negative evidence
including past operating results and forecasts of future taxable
income. In assessing the amount of the valuation allowance as of
October 31, 2007 and 2008, the Company considered, in particular, its forecasted
operations for the upcoming fiscal year, current backlog of orders, including
those recently received, and other significant opportunities currently in its
sales and marketing pipeline with a high probability of generating
revenues. Based upon this review, the Company will continue to fully
reserve for all deferred tax assets as of October 31, 2008.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”),
on November 1, 2007. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109, “Accounting
for Income Taxes” . It prescribes that a company should use a
more-likely-than-not recognition threshold based on the technical merits of the
tax position taken. Tax positions that meet the more-likely-than-not
recognition threshold should be measured as the largest amount of the tax
benefits, determined on a cumulative probability basis, which is more likely
than not to be realized upon effective settlement in the financial
statements. The Company’s unrecognized tax benefits at October 31,
2008 are approximately $61,000, which includes approximately $49,000 of
unrecognized tax benefits for windfall tax benefits from stock options exercised
that are not recognized under SFAS No. 123R. During the year ended
October 31, 2008, the Company increased its unrecognized tax benefits by
approximately $100,000 due to windfall benefits from stock options exercised and
additional exposures identified during the year. The Company reduced
its unrecognized tax benefits by approximately $654,000 by adjusting its NOL
carryforwards and making an automatic change in accounting
method. Both of these adjustments were made with the filing of the
Company’s income tax return for the tax year ended October 31,
2007. The Company added $49,000 of unrecognized tax benefit
associated with tax deductions for stock option and warrant exercises in excess
of corresponding book charges per SFAS 123R. The Company also added
$51,000 of unrecognized tax benefit to account for revisions in supporting
documentation. The Company has a valuation allowance against the full
amount of its net deferred tax assets and therefore the adoption of FIN 48 had
no impact on its retained earnings. The amount of unrecognized tax
benefits that, if recognized, would impact the effective tax rate is
$0.
The
Company conducts business in the U.S. and is subject to U.S.
taxes. As a result of our business activities, the Company files tax
returns that are subject to examination by the respective federal and state tax
authorities. For income tax returns filed by us, the Company is no
longer subject to U.S. federal, or state tax examination by tax authorities for
years before the tax year ended October 31, 2005, although significant net
operating loss carry forward tax attributes that were generated prior to the tax
year ended October 31, 2005 may still be adjusted upon examination by tax
authorities if they either have been or will be utilized. The
Company’s accounting policy is to recognize interest and penalties related to
income tax matters in general and administrative expense. The Company
has $0 accrued for interest and penalties as of October 31, 2008.
Inventory
Inventory
consists of materials and components used in the assembly of the Company’s
products or maintained to support maintenance and warranty obligations and are
stated at the lower of cost or market using actual costs on a first-in,
first-out basis. The Company maintains a perpetual inventory system
and continuously records the quantity on-hand and actual cost for each product,
including purchased components, subassemblies and finished goods. The
Company maintains the integrity of perpetual inventory records through periodic
physical counts of quantities on hand. Finished goods are reported as
inventory until the point of title transfer to the
customer. Generally, title transfer is documented in the terms of
sale. When the terms of sale do not specify, the Company assumes
title transfers when it completes physical transfer of the products to the
freight carrier unless other customer practices prevail.
F-9
The
Company periodically evaluates its inventory obsolescence reserve to ensure
inventory is recorded at its net realizable value. The Company’s
policy is to assess the valuation of all inventories, including manufacturing
raw materials, work-in-process, finished goods and spare parts in each reporting
period. In fiscal 2007, the Company adjusted the cost of excess and
obsolete inventory to its net realizable value and released the obsolete or
excess inventory reserve that was created in prior fiscal
years. Inherent in managements estimates of excess and obsolete
inventory are management’s forecasts related to the Company’s future
manufacturing schedules, customer demand, technological and/or market
obsolescence and possible alternative uses. If future customer demand
or market conditions are less favorable than the Company’s projections,
additional inventory write-downs may be required, and would be reflected in cost
of sales in the period the revision is made. For fiscal year ending
2007 and 2008 the Company incurred charges to expense of $86,000 and $186,000,
respectively, associated with excess and obsolete inventory cost
adjustments.
Warranty
Typically,
the sale of the Company’s specialized servers includes providing parts and
service warranty to customers as part of the overall price of the
system. The Company offers warranties for its systems that typically
cover a period of 1 to 2 years and commence upon shipment of the system to the
customer. When appropriate, the Company records a reserve for
estimated warranty expenses to cost of sales for each system upon revenue
recognition. The amount recorded is based on an analysis of
historical activity. All actual parts and labor costs incurred in
subsequent periods are charged to the established reserves.
Actual
warranty expenses are incurred on a system-by-system basis, and may differ from
the Company’s original estimates. While the Company periodically
monitors the performance and cost of warranty activities, if actual costs
incurred are different than its estimates, the Company may recognize adjustments
to the reserve in the period in which those differences arise or are
identified.
In
addition to the provision of standard warranties, the Company offers
customer-paid extended warranty services. Revenues for extended
maintenance and warranty services with a fixed payment amount are recognized on
a straight-line basis over the term of the contract.
Research
and Product Development Expenses
The
Company expenses research and product development costs as
incurred. These costs consist primarily of labor charges associated
with development of the Company’s commercial and
federal products. These research and development expenses
amounted to approximately $662,000 and $702,000 during fiscal 2007 and 2008,
respectively.
The
Company invests in intellectual property in the form of proprietary products
such as SteelWorks®. SteelWorks® is an appliance management software
that provides self-management and self-maintenance functionality to its
appliance server offerings and allows its customers to quickly create a fully
integrated turnkey appliance server. The Company is working to expand
SteelWorks® to address the needs of small to midsize businesses that require
access to company data and attachments via their Blackberry handheld
device. This product is called SteelWorks® Mobile for the Blackberry
Enterprise Server. This mobile business solution makes a BlackBerry®
connection to company data and attachments easy to install and easy to
manage. It is hardware and software in a low cost easy to install
solution.
Cash
and Cash Equivalents
The
Company maintains demand deposit accounts with principally one financial
institution. At times, deposits exceed federally insured limits, but
management does not consider this a significant concentration of credit risk
based on the strength of the financial institution. The Company
considers all highly liquid investments with a maturity of three months or less
at the time of purchase to be cash equivalents.
Financial
Instruments and Concentration of Credit Risk
The
carrying value of the Company’s financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities, notes
payable and its line of credit approximates fair value. Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and accounts receivable. The cash is
held by high credit quality financial institutions. For accounts
receivable, the Company performs ongoing credit evaluations of its customers’
financial condition and generally does not require collateral. The
Company maintains reserves for possible credit losses. As of October
31, 2007 and 2008, the Company had allowance for doubtful account balances of
approximately $40,000 and $36,000, respectively. The carrying amount
of the receivables approximates their fair value.
F-10
Advertising
Expenses
The
Company expenses advertising costs as incurred. Advertising costs
consisted of expenditures for tradeshows, website maintenance, radio
advertisements, and other charges associated with the dissemination of important
Company news and product features to the public. Advertising expense
amounted to approximately $125,000 and $298,000 during fiscal 2007 and 2008,
respectively.
Earnings
Per Share
The
Company follows the provisions of Statement of Financial Accounting Standards
No. 128, “ Earnings Per
Share” which requires the Company to present basic and fully diluted
earnings per share. Basic earnings per share is based on the weighted
average shares outstanding during the period. Diluted earnings per
share increases the shares used in the basic share calculation by the dilutive
effect on net income from continuing operations of stock options and
warrants. The dilutive weighted average number of common shares
outstanding excluded potential common shares from stock options of approximately
557,000 and 352,000 for the fiscal years ending October 31, 2007 and 2008
respectively. These shares were excluded from the earnings per share
calculation due to their antidilutive effect resulting from the loss from
operations.
Recent
Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “ Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 provides a common
definition of fair value and establishes a framework to make the measurement of
fair value in U.S. Generally Accepted Accounting Principles more consistent and
comparable. SFAS No. 157 also requires expanded disclosures to
provide information about the extent to which fair value is used to measure
assets and liabilities, the methods and assumptions used to measure fair value,
and the effect of fair value measures on earnings. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007. Therefore, the Company is required to adopt SFAS No. 157 in the
first quarter of 2009. The Company does not believe the provisions of
SFAS 157 will have a material impact on its financial
statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 provides a
choice to measure many financial instruments and certain other items at fair
value and requires disclosures about the election of the fair value
option. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15,
2007. Therefore, the Company is required to adopt SFAS No. 159 in the
first quarter of 2009. The Company does not believe the provisions of
SFAS 159 will have a material impact on its financial
statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) “Business
Combinations” (“SFAS No. 141R”). SFAS No. 141R, which replaces
SFAS No. 141, requires that the acquisition method of accounting (which SFAS No.
141 called the “purchase method”) be used for all business combinations and for
an acquirer to be identified for each business combination. SFAS No.
141R also establishes principles and requirements for how the acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. SFAS No. 141R also
requires that acquisition-related costs be recognized separately from the
business combination. SFAS No. 141R will apply prospectively to
business combinations for which the acquisition date is after fiscal years
beginning on or after December 15, 2008. The Company is in the
process of evaluating the effect, if any; the adoption of SFAS No. 141(R) will
have on its financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS
No. 160”). SFAS No. 160 requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. Its intention is to eliminate the
diversity in practice regarding the accounting for transactions between an
entity and noncontrolling interests. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is
prohibited. The Company is in the process of evaluating the effect,
if any; the adoption of SFAS No. 160 will have on its financial
statements.
In
February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement
No. 157” (“FSP 157-2”). FSP 157-2 deferred the effective date
of FAS 157 for all nonfinancial assets and nonfinancial liabilities to fiscal
years beginning after November 15, 2008. The Company is in the
process of evaluating the effect, if any; the adoption of FSP 157-2 will have on
its financial statements.
F-11
In
October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for that Asset is not Active” (“FSP
157-3”). FSP 157-3 provides guidance for determining the fair value
of a financial asset in an inactive market. The Company is in the
process of evaluating the effect, if any; the adoption of FSP 157-3 will have on
its financial statements.
In May
2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion.” (“APB 14-1”).
APB 14-1 requires that the liability and equity components of convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) be separately accounted for in a manner that reflects an issuer’s
nonconvertible debt borrowing rate. The resulting debt discount is
amortized over the period the convertible debt is expected to be outstanding as
additional non-cash interest expense. APB 14-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Retrospective
application to all periods presented is required except for instruments that
were not outstanding during any of the periods that will be presented in the
annual financial statements for the period of adoption but were outstanding
during an earlier period. The Company in the process of evaluating
the effect, if any; the adoption of APB 14-1 will have on its financial
statements.
4.
|
Inventories
|
Inventories
consisted of the following:
Years ended October 31,
|
||||||||
2007
|
2008
|
|||||||
Raw
materials
|
$
|
758,154
|
$
|
344,898
|
||||
Work
in process
|
290,603
|
-
|
||||||
Finished
goods
|
129,638
|
177,022
|
||||||
$
|
1,178,395
|
$
|
521,920
|
5.
|
Property and Equipment and
Equipment on Lease
|
Property
and equipment, including leasehold improvements, are stated at
cost. Property and equipment are depreciated using the straight-line
method over the estimated useful lives ranging from one to five
years. Furniture and fixtures are depreciated over an estimated
useful life of five years. Leasehold improvements are amortized over
the related lease term.
Any
tenant allowances have been recorded as deferred rent and will be recognized as
a reduction in rent expense over the applicable lease term.
Property
and equipment consisted of the following:
Years ended October 31,
|
||||||||
2007
|
2008
|
|||||||
Computer
and office equipment
|
$
|
637,063
|
$
|
296,215
|
||||
Furniture
and fixtures
|
38,530
|
38,530
|
||||||
Leasehold
improvements
|
941,617
|
941,617
|
||||||
Other
|
230,279
|
112,668
|
||||||
1,847,489
|
1,389,030
|
|||||||
Less
accumulated depreciation and amortization
|
(1,045,201
|
)
|
(762,590
|
)
|
||||
$
|
802,288
|
$
|
626,440
|
As
discussed in Note 3 “Significant Accounting
Policies” to the Notes to Consolidated Financial Statements, the Company
owns equipment that is currently at customer sites under multiple operating
lease agreements. The cumulative cost of the equipment was $1,196,195
and $987,741 at October 31, 2007 and 2008 respectively. The Company
depreciates its leased property and equipment assets over the lesser of the
related lease term or the useful life of the leased asset. The
related cumulative accumulated depreciation on the equipment was $872,291 and
$545,642 at October 31, 2007 and 2008, respectively.
F-12
6.
|
Bank Lines of Credit and Notes
Payable
|
Operating
Line of Credit
On March
6, 2008, the Company renewed its bank line of credit that allows the Company to
borrow an amount to the lesser of its collateralized cash on hand or $3.5
million. The line of credit bears interest at the LIBOR Market Index
rate plus 1.25%. The line of credit is secured by all assets of the
Company and
expires and is subject to renewal on March 31, 2009. There were no
outstanding borrowings on the line of credit at October 31, 2007 and
2008.
Notes
Payable
Notes
payable consisted of the following:
Years ended October 31,
|
||||||||
2007
|
2008
|
|||||||
Asset
loans, bearing interest at annual interest rates from 0.0% to 4.9% due in
aggregate monthly payments of $676 to expire in October
2010, $348 and $359, that expired in July 2008 and July 2008,
respectively, secured by certain assets of the Company
|
$
|
28,284
|
$
|
15,441
|
||||
Less
current portion
|
12,842
|
7,538
|
||||||
Notes
payable, long-term
|
$
|
15,442
|
$
|
7,903
|
7.
|
Commitments
|
Operating
Leases
The
Company has executed non-cancelable leases for its headquarters and operations
facilities. The operating expenses associated with these facilities
are included in the monthly rent expense. The operations facilities
lease expires in August 2014 and the headquarters lease expires in August
2009. The Company recognizes rent holiday periods, scheduled rent
increases and tenant improvement allowances on a straight-line basis over the
lease term beginning with the commencement date of the lease. Rent
expense for office space under these leases, which is recorded on a
straight-line basis over the life of each lease, was approximately $526,000 and
$526,000 for the years ended October 31, 2007, and 2008,
respectively.
Additionally,
the Company leases office equipment under non-cancelable operating leases
expiring in September of 2009. Total rental expense was $21,000 and
$19,000 for the years ended October 31, 2007, and 2008,
respectively.
Future
minimum lease expenditures under all non-cancelable operating leases at October
31, 2008 are as follows:
2009
|
485,823
|
|||
2010
|
268,991
|
|||
2011
|
268,991
|
|||
2012
|
268,991
|
|||
2013
|
268,991
|
|||
2014
|
224,160
|
|||
Total
|
$
|
1,785,947
|
8.
|
Employment
Agreements
|
The
Company has employment contracts for two key executives. The
agreements have terms of 3 years, expiring in August 2010 and October 2010,
respectively, and automatically renew for additional one-year terms unless
terminated by either the Company or the employee. The aggregate
annual minimum commitment under these agreements is approximately
$475,000.
In August
2007, the Company entered into an employment agreement with Mr. Frick pursuant
to which Mr. Frick will serve as the Company's President and Chief Executive
Officer. The term of the Employment Agreement is for three years,
subject to certain termination provisions. Also in August 2007, the
Company entered into an employment resignation agreement with Cliff Sink
pursuant to which Mr. Sink resigned his positions as President and Chief
Executive Officer and Board Member of the Company effective November 1,
2007.
F-13
On
October 31, 2007, the Company entered into an amended employment agreement with
Kevin Murphy, the Company's current Chief Financial Officer, pursuant to which
the terms of Mr. Murphy's employment agreement, dated June 8, 2004, were
amended. Under the terms of the Amended Agreement, Mr. Murphy shall
continue to serve as the Chief Financial Officer of the Company for an
additional thirty-six (36) months, commencing from the date of the Amended
Agreement. Mr. Murphy shall also serve as the Company's Executive
Vice President.
9.
|
Stockholders’
Equity
|
Issuance
of Unregistered Common Stock
On March
7, 2007, the Company issued 21,504 shares of our common stock to members of its
Board of Directors. The shares were valued at $0.99 based upon the
closing price of the Company’s common stock on that date. The total
expense associated with this stock issuance was approximately
$21,000.
Warrants
On
September 14, 2007, the Company issued 100,000 warrants in exchange for investor
relations services valued at approximately $56,000. The warrants were
issued at an exercise price of $1.28 and expires on September 14,
2012. The fair value of the warrants was estimated in four equal
tranches over a four-month vesting period using the Black- Scholes Option
pricing fair value model.
The
Company recognized $40,000 and $56,000 of sales and marketing expense associated
with the issuance of warrants in exchange for services for the fiscal years
ended October 31, 2007 and 2008 respectively.
10.
|
Stock Based
Compensation
|
The
Company adopted Statement of Financial Accounting Standards No. 123 (Revised
2004), “ Share-Based
Payment ” (“SFAS No. 123R”) on November 1, 2005. Issued in
December 2004, SFAS No. 123R requires that the compensation cost relating to
share-based payment transactions be recognized in financial
statements. Under the provisions of SFAS No. 123R, share-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized over the employee’s requisite service
period. Stock-based compensation expense for the year ended October
31, 2007 and 2008 increased the Company’s basic and diluted loss per share by
approximately $0.03 and $0.03, respectfully. The estimated fair value
of the Company’s stock-based awards is amortized on a straight-line basis over
the awards’ vesting period.
A summary
of the total stock-based compensation expense for the fiscal years ended October
31, 2007 and 2008 is as follows:
Year ended October 31,
|
||||||||
2007
|
2008
|
|||||||
Stock based expense
allocation
|
||||||||
Cost
of goods sold
|
$
|
-
|
$
|
24,000
|
||||
General
and administrative
|
286,000
|
294,000
|
||||||
Selling
and marketing
|
-
|
29,000
|
||||||
Research
and development
|
-
|
21,000
|
||||||
Severance
and restructuring
|
57,000
|
-
|
||||||
Total
stock compensation
|
$
|
343,000
|
$
|
368,000
|
F-14
Stock
Option s
In
January 1997, the Company adopted the 1997 Stock Option Plan (the “1997
Option Plan”). Under the 1997 Option Plan, options to purchase a
maximum of 2,650,000 shares of the Company’s common stock (subject to
adjustments in the event of stock splits, stock dividends, recapitalizations and
other capital adjustments) may be granted to employees, officers and directors
of the Company and certain other persons who provide services to the
Company. In addition, the Company established the 2002 Stock Option
Plan (the “2002 Option Plan”) in May 2002, which permits the Company to grant up
to 750,000 options to employees, officers and directors of the Company and
certain other persons who provide services to the Company under that
Plan. In May 2004, the Company’s shareholders approved an amendment
to the Company’s 2002 Stock Option Plan to increase the number of options
available under the plan from 750,000 to 1,500,000. In May 2007, the
Company’s shareholders approved the 2007 Stock Option Plan which permits the
Company to grant up to 1,500,000 options to employees, officers and directors of
the Company. In May 2008, the Company’s shareholders approved an
amendment to the Company’s 2007 Stock Option Plan creating the Amended 2007
Stock Option and Restricted Stock Plan (the “2007 Option and Restricted Stock
Plan”). The 2007 Stock Option and Restricted Stock Plan permits the
Company to issue restricted stock awards to employees, officers and directors of
the Company in addition to stock option awards.
As of
October 31, 2008, there were no options available for future grants under the
1997 Option Plan, 158,710 options available for future grants under the 2002
Option Plan and 1,433,334 options and/or restricted stock awards available for
future grants under the 2007 Option and Restricted Stock Plan.
Stock
options are generally granted at the fair market value of its common stock at
the date of grant. The options vest ratably over a stated period of
time not to exceed four years. The contractual terms of the options
are five or ten years.
A summary
of the Company’s stock option activity as of October 31, 2008 is presented
below:
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
||||||||||
Outstanding
at October 31, 2007
|
1,786,000
|
$
|
1.13
|
3.17
|
||||||||
Exercisable
at October 31, 2007
|
686,625
|
$
|
1.60
|
2.33
|
||||||||
Options
granted
|
1,015,000
|
$
|
1.26
|
|||||||||
Options
exercised
|
196,290
|
$
|
0.62
|
|||||||||
Options
canceled or expired
|
622,210
|
$
|
1.13
|
|||||||||
Outstanding
at October 31, 2008
|
1,982,500
|
$
|
1.24
|
3.42
|
||||||||
Exercisable
at October 31, 2008
|
879,584
|
$
|
1.36
|
2.51
|
The total
options outstanding do not include 600,000 non-qualified options granted to the
former IDP stockholders that are not included in the Option Plan.
The
aggregate intrinsic value of options exercised during the fiscal years ended
October 31, 2008 was approximately $93,000. There were no options
exercised during the fiscal year ended October 31, 2007. The
intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option. There was
no intrinsic value for options outstanding or options exercisable for year ended
October 31, 2008.
The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing fair value model. This model is
calculated based on exercise price, an expected annual dividend yield of 0% and
several subjective assumptions, including the expected term and expected stock
price volatility over the expected term. The weighted-average
grant-date fair value of options granted during the fiscal years ended October
31, 2007 and 2008 was $0.39 and $0.51, respectively.
F-15
The fair
value of the Company’s Stock Option awards granted during the fiscal year ended
October 31, 2007 were estimated based upon the following
assumptions:
Years ended October 31,
|
||||||
2007
|
2008
|
|||||
Expected
term (years) 1
|
0.42
to 3.50
|
3.25
to 3.70
|
||||
Expected
stock price volatility 2
|
58.2% to 64.2%
|
57.6% to 60.1%
|
||||
Weighted
average volatility 2
|
59.4%
|
58.80%
|
||||
Risk-free
interest rate 3
|
3.81%
to 5.03%
|
2.03%
to 2.92%
|
1
- Expected
term. For awards granted
prior to January 1, 2008 , expected
term for the stock option awards was calculated based upon the simplified method
set out in the SEC Staff Accounting Bulletin No. 107 (“ SAB
107”). For awards granted after January 1, 2008 the Company continued
to use the simplified method set out in SAB 107 for grants with two-year graded
vesting for which it lacked sufficient historical share option exercise data in
accordance with SEC Staff Accounting Bulletin No. 110. Expected term
for grants of one year cliff vesting stock option awards was calculated based
upon historical share option exercises for which the Company did have sufficient
historical data.
2
- Expected
stock price volatility. Expected stock price volatility for
Stock Option awards is calculated using the weighted average of the Company’s
historical volatility over the expected term of the award.
3
- Risk-free
interest rate. The risk-free interest rate is calculated
based on the U.S Treasury yield curve on the grant date and the expected term of
the award.
The
Company modified the stock option agreement of one employee in fiscal year
2007. As a result of the modification the Company recorded and
additional $57,000 of stock-based compensation expense which was recorded as
severance and restructuring expense.
A summary
of the Company’s outstanding stock options at October 31, 2008 is as
follows:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||
Range of Exercise Prices
|
Number
Outstanding
|
Weighted-
Average
Exercise
Price
|
Average
Remaining
Contractual
Life
|
Number
Outstanding
|
Weighted-
Average
Exercise
Price
|
|||||||||||||||
$0.55-$1.75
|
1,687,500
|
$
|
1.04
|
3.84
|
584,584
|
$
|
0.85
|
|||||||||||||
$1.76-$4.50
|
295,000
|
$
|
2.37
|
1.00
|
295,000
|
$
|
2.37
|
|||||||||||||
$0.55-$4.50
|
1,982,500
|
$
|
1.24
|
3.42
|
879,584
|
$
|
1.36
|
A summary
of the status of the Company’s nonvested shares as of October 31, 2008, and
changes during the fiscal year ended October 31, 2008, is presented
below:
Shares
|
Weighted-
Average
Grant-Date
|
|||||||
Nonvested
at October 31, 2007
|
1,099,375
|
$
|
.046
|
|||||
Options
granted
|
1,015,000
|
$
|
0.51
|
|||||
Options
vested
|
(606,459
|
)
|
$
|
0.51
|
||||
Options
forfeited
|
(405,000
|
)
|
$
|
0.36
|
||||
Nonvested
at October 31, 2008
|
1,102,916
|
$
|
0.52
|
The
Company recognized approximately $306,000 and $364,000 of stock-based
compensation expense associated with stock option awards in the fiscal years
ended October 31, 2007 and 2008, respectively. As of October 31,
2008, unrecognized compensation expense related to nonvested stock options was
$341,000 which is expected to be recognized through September 2010 over a
weighted average period of 0.65 years. The total fair value of shares
vested during the years ended October 31, 2007, and 2008 was approximately
$111,000 and $309,000 respectively.
F-16
Employee
Stock Purchase Plan
In
August, 1998, the Board adopted an Employee Stock Purchase Plan (“ESPP”) whereby
employees may purchase Company stock through a payroll deduction
plan. The purchase price of the stock is the lower of 85% of the fair
market value on the first or last day of the applicable six month offering
period. All employees, including officers but not directors, are
eligible to participate in this plan. Executive officers whose stock
ownership of the Company exceeds five percent of the outstanding common stock
are not eligible to participate in this plan. In May 2007, the
Company’s shareholders approved an amendment to the ESPP that increased the
number of shares available for issuance from 300,000 to 600,000.
As of
October 31, 2008, there were 267,765 options available for future grants under
the Amended Stock Purchase Plan.
The fair
value of each ESPP award is estimated on the date of the grant using the
Black-Scholes option-pricing fair value model. This model is
calculated based on exercise price, an expected annual dividend yield of 0%, the
expected term and a subjective assumption, expected stock price volatility over
the expected term. The Company used FASB Technical Bulletin No. 97-1,
“Accounting under Statement
123 for Certain Employee Stock Purchase Plans with a Look-Back Option,”
in determining the fair value of its ESPP awards. The fair value of
the Company’s ESPP awards granted during the fiscal year ended October 31, 2007
and 2008 was estimated based upon the following assumptions:
Years ended October 31,
|
||||||
2007
|
2008
|
|||||
Expected
term (years) 1
|
0.50
|
0.50
|
||||
Expected
stock price volatility 2
|
67.9% to 83.6%
|
64.6
|
%
|
|||
Risk-free interest rate
3
|
4.15% to 5.09%
|
1.53
|
%
|
1
- Expected
term. Expected term for ESPP awards is equal to the vesting
period of the award.
2
- Expected
stock price volatility. Expected stock price volatility for
ESPP awards is calculated using the weighted average of the Company’s historical
volatility over the expected term of the award.
3
- Risk-free
interest rate. The risk-free interest rate is calculated
based on the U.S. Treasury yield curve on the grant date and the expected term
of the award.
The
Company recognized approximately $4,000 of stock-based compensation expense
associated with ESPP awards in the fiscal year ended October 31,
2008. As of October 31, 2008, there was not any unrecognized
compensation cost related to ESPP awards.
Restricted
Stock Awards
Restricted
stock awards are issued pursuant to the Company’s 2007 Stock Option and
Restricted Stock Plan. The Company’s restricted stock grants are
accounted for as equity awards. The expense is based on the price of
the Company’s common stock, and is recognized on a straight-line basis over the
requisite service period. The Company’s restricted stock agreements
do not contain any post-vesting restrictions. The restricted stock
award grants vest ratably over a two to three year period.
In
September of 2007, the Company granted 180,000 shares of restricted
stock. The weighted average restricted stock grant fair value for
fiscal year ended October 31, 2007 was $1.22. None of the restricted
stock award grants were vested or cancelled in the fiscal year ended October 31,
2007. No restricted stock awards were granted during the fiscal year
ended October 31, 2008.
A summary
of the Company’s restricted stock award activity as of October 31 , 2008, and
changes during the year then ended are as follows:
Shares
|
Weighted-
Average
Price/Share
|
Intrinsic
Value
|
||||||||
Nonvested
at October 31, 2007
|
180,000
|
$
|
1.22
|
|||||||
Granted
|
-
|
$
|
-
|
|||||||
Vested
and issued
|
-
|
$
|
-
|
|||||||
Cancelled
|
(113,334
|
)
|
$
|
1.24
|
||||||
Nonvested
at October 31, 2008
|
66,666
|
$
|
1.20
|
$
|
39,332
|
The
Company recognized $5,000 of stock-based compensation expense associated with
restricted stock awards in the fiscal year ended October 31,
2007. The Company did not recognize any stock-based compensation
expense associated with restricted stock awards in the fiscal year ended October
31, 2008. As of October 31, 2008, unrecognized compensation expense
related to nonvested restricted stock awards was $75,000 which is expected to be
recognized through September 2010 over a weighted average period of 1.36
years.
F-17
11.
|
Income
Taxes
|
The
provision for income taxes consists of the following:
Years ended October 31,
|
||||||||
2007
|
2008
|
|||||||
Current:
|
||||||||
Federal
|
$
|
-
|
$
|
-
|
||||
State
|
-
|
-
|
||||||
Deferred:
|
||||||||
Federal
|
-
|
-
|
||||||
State
|
-
|
-
|
||||||
Total
Provision for income taxes
|
$
|
-
|
$
|
-
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Components
of the Company’s net deferred tax asset balance are as follows:
Years ended October 31,
|
||||||||
2007
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Current
portion:
|
||||||||
Accrued
expenses
|
$
|
114,633
|
$
|
61,390
|
||||
Asset
reserves
|
14,498
|
72,156
|
||||||
Other
|
3,452
|
31,674
|
||||||
Total
current portion
|
132,583
|
165,220
|
||||||
Long
term portion:
|
||||||||
Net
operating loss carryforwards
|
15,357,452
|
16,318,196
|
||||||
Deferred
rent
|
65,603
|
58,768
|
||||||
Stock
compensation
|
25,418
|
83,890
|
||||||
Investment
reserve
|
55,009
|
55,252
|
||||||
Depreciation
|
149,823
|
153,128
|
||||||
Intangibles
|
827,821
|
757,560
|
||||||
Total
long term portion
|
16,481,126
|
17,426,794
|
||||||
Deferred
tax credit:
|
||||||||
Valuation
allowance
|
(16,613,709
|
)
|
(17,525,032
|
)
|
||||
Total
deferred tax asset
|
$
|
-
|
$
|
66,982
|
||||
Deferred
tax liabilities:
|
||||||||
Current
portion:
|
||||||||
Change
in accounting method
|
-
|
(33,491
|
)
|
|||||
Long
term portion:
|
||||||||
Change
in accounting method
|
-
|
(33,491
|
)
|
|||||
Total
deferred tax liability
|
$
|
-
|
$
|
(66,982
|
)
|
|||
Net
deferred tax asset
|
$
|
-
|
$
|
-
|
As of
October 31, 2008, the Company had approximately $44.4 million in pretax net
operating loss carryforwards reported on its tax returns, which expire between
2011 and 2028. Of this amount, approximately 132,000 is unrecognized
in the financial statement under SFAS 123R related to stock-based compensation
that has not yet provided a benefit due to the Company’s net operating loss
position. The Company completed an analysis as of October 31, 2008 to
determine whether there was any limitation on its net operating loss
carryforwards under Section 382 of the Internal Revenue Code. The
Company determined that as of October 31, 2008, there was no limitation on its
net operating loss carryforwards.
F-18
As of
October 31, 2008, the Company has recorded a valuation allowance of
approximately $17.5 million against the total deferred tax asset of $17.6
million. The portion of the valuation allowance for which
subsequently recognized benefits will increase stockholders’ equity was $0.3
million. In assessing the amount of the valuation allowance as of
October 31, 2008, we considered, in particular, our forecasted operations for
the next fiscal year, taking into account our year to date results of
operations, current backlog of orders, including those recently received, and
other significant opportunities currently in our sales and marketing pipeline
with a high probability of generating revenues. Based upon this
review, management determined that it is not more likely than not its net
deferred tax assets will be realized and has provided a valuation allowance
against all deferred tax assets as of October 31, 2008.
The
reconciliation of income tax from the federal statutory rate of 34%
is:
Years ended October 31,
|
||||||||
2007
|
2008
|
|||||||
Tax
at statutory rates:
|
$
|
(661,162
|
)
|
$
|
(938,251
|
)
|
||
Non-deductible
(income) expenses, net
|
8,141
|
8,866
|
||||||
Stock
based compensation
|
92,718
|
73,784
|
||||||
Valuation
allowance
|
(957,715
|
)
|
911,323
|
|||||
State
income tax, net of federal benefit
|
(51,974
|
)
|
(78,216
|
)
|
||||
Change
in state tax rates
|
885,957
|
(73,201
|
)
|
|||||
True-up
of net-operating loss
|
687,854
|
87,985
|
||||||
Other
|
(3,819
|
)
|
7,710
|
|||||
$
|
-
|
$
|
-
|
The
Company conducts business in the U.S. and is subject to U.S.
taxes. As a result of its business activities, the Company files tax
returns that are subject to examination by the respective federal and state tax
authorities. For income tax returns filed by the Company, the Company
is no longer subject to U.S. federal, or state tax examination by tax
authorities for years before the tax year ended October 31, 2005, although
significant net operation loss carry forward tax attributes that were generated
prior to the tax year ended October 31, 2005 may still be adjusted upon
examination by tax authorities if they either have been or will be
utilized.
As a
result of the adoption of FIN 48, the Company identified unrecognized tax
benefits of $615,674 related to tax positions taken in prior years that did not
meet the more-likely-than-not recognition threshold based on the technical
merits of the tax position taken. We have a valuation
allowance against the full amount of our net deferred tax assets and therefore,
the adoption of FIN 48 had no impact on our retained earnings.
During
the year ended October 31, 2008, we increased our unrecognized tax benefits by
approximately $100,000 due to windfall benefits from stock options exercised and
additional exposures identified during the year. The Company reduced
its unrecognized tax benefits by approximately $654,000 by adjusting its NOL
carryforwards and making an automatic change in accounting
method. Both of these adjustments were made with the filing of the
Company’s income tax return for the year ended October 31, 2007 in July
2008.
The
change in the Company’s unrecognized tax benefits related to FIN 48 and
SFAS 123R are shown in the table below:
Balance
at November 1, 2007
|
$
|
615,674
|
||
Additions
related to current year tax positions
|
50,971
|
|||
Additions
related to current year windfall tax benefits not recognized under SFAS
123R
|
48,697
|
|||
Reduction
for tax positions related to the current year
|
-
|
|||
Additions
for tax positions of prior years
|
54
|
|||
Reductions
for tax positions of prior years
|
-
|
|||
The
amounts of decreases in the unrecognized tax benefits
relating to settlements with taxing authorities
|
(654,251
|
)
|
||
Expiration
of the statute of limitations for the assessment of taxes
|
-
|
|||
Balance
at October 31, 2008
|
$
|
61,145
|
The
amount of unrecognized tax benefits that, if recognized, would impact the
effective tax rate is zero. The Company does not expect its
unrecognized tax benefit liability to change significantly over the next
12 months. The Company’s accounting policy is to recognize
interest and penalties related to income tax matters in general and
administrative expense. The Company has $0 accrued for interest and
penalties as of October 31, 2008.
F-19
The
exercise of stock options during the year ended October 31, 2008 generated an
income tax deduction equal to the excess of the fair market value over the
exercise price. In accordance with SFAS No. 123R, the Company
will not recognize a deferred tax asset with respect to the excess stock
compensation deductions until those deductions actually reduce the Company’s
income tax liability. As such, the Company has not recorded a
deferred tax asset related to the net operating losses of approximately $132,000
resulting from the exercise of these stock options in the accompanying financial
statements. At such time as the Company utilizes these net operating
losses to reduce income tax payable, the tax benefit will be recorded as an
increase in additional paid in capital.
12.
|
Earnings Per
Share
|
Basic net
income per share is computed by dividing net income by the weighted-average
number of common shares outstanding during the period. Diluted net
income per share is computed, using the treasury stock method, as though all
potential common shares that are dilutive were outstanding during the
period. The following table provides a reconciliation of the
numerators and denominators of the basic and diluted computations for net (loss)
per share.
Years ended October 31,
|
||||||||
2007
|
2008
|
|||||||
Numerator:
|
||||||||
Net
(loss) from operations
|
$
|
(1,944,595
|
)
|
$
|
(2,759,562
|
)
|
||
Denominator:
|
||||||||
Denominator
for basic earnings per share- weighted-average shares
|
14,286,551
|
14,493,215
|
||||||
Effect
of dilutive securities:
|
||||||||
Employee
stock options
|
–
|
–
|
||||||
Warrants
|
–
|
–
|
||||||
Restricted
stock
|
–
|
–
|
||||||
Dilutive
potential common shares
|
–
|
–
|
||||||
Denominator
for diluted earnings per share - adjusted weighted-average shares and
assumed conversions
|
14,286,551
|
14,493,215
|
||||||
(Loss)
per share from operations, basic and diluted
|
$
|
(0.14
|
)
|
$
|
(0.19
|
)
|
13.
|
Retirement
Plans
|
401(k)
Plans
The
Company maintains a 401(k) (the “Plan”) for all current
employees. Under the Plan, employees are eligible to participate the
first calendar day of the month following their first day of service and
attaining the age of 18. Employees could defer up to $15,500 of
compensation in calendar year 2008. Employee contributions are
subject to Internal Revenue Service limitations. All employees who
contributed to the Plan are eligible to share in discretionary Company matching
contributions. The Company match is equal to 50% of employee
contributions up to 6%. Company contributions vest over 5
years. In fiscal 2007 and 2008, the Company contributed approximately
$88,000 and $72,000 to the participants of the 401(k),
respectively.
14.
|
Segment
Reporting
|
FASB
Statement of Financial Accounting Standards No. 131, “ Disclosures about Segments of an
Enterprise and Related Information” (“SFAS No. 131”) , establishes standards for
reporting information about operating segments. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and in assessing performance. SFAS No. 131 also establishes a
quantitative threshold, whereby an enterprise should report separately
information about operating segments if its reported revenue is 10% or more of
the combined revenue of all reported operating segments. The Company
is organized on the basis of products and services. The Company’s
chief operating decision maker is the Company’s Chief Executive
Officer. While the Chief Executive Officer is apprised of a variety
of financial metrics and information, the Chief Executive Officer makes
decisions regarding how to allocate resources and assess performance based on a
single operating unit.
F-20
15.
|
Related Party
Transactions
|
An
individual who is a director is also founding member of Gersten Savage LLP, who
provides legal services to the Company. During the fiscal years ended
October 31, 2007 and 2008, the Company paid Gersten Savage LLP approximately
$83,000 and $93,000, respectively, in legal fees.
16.
|
Commitments and
Contingencies
|
The
Company has accrued approximately $58,000 pertaining to non-income taxes and
related interest and penalties that would have resulted from the failure to file
the associated returns. The Company intends to file the necessary
returns to resolve the contingency.
17.
|
Subsequent
Event
|
On
January 12, 2009, the Company and Robert E. Frick, the Company’s Chief Executive
Officer and President, mutually terminated Mr. Frick’s employment agreement as a
result of Mr. Frick’s health. Mr. Frick also resigned from the
Board.
On
January 14, 2009, the Board appointed Brian Hajost, a former executive officer
of the Company, as the Company’s Chief Executive Officer, President and a member
of the Board, and Kevin Murphy, the Company’s current Chief Financial Officer
and Executive Vice President, as a member of the Board.
F-21
STEELCLOUD,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
October 31,
|
July 31,
|
|||||||
2008
|
2009
|
|||||||
|
(unaudited)
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$
|
752,351
|
$
|
366,210
|
||||
Accounts
receivable, net
|
1,571,673
|
202,201
|
||||||
Inventory,
net of inventory reserve of $0
|
521,920
|
111,457
|
||||||
Prepaid
expenses and other current assets
|
130,446
|
249,362
|
||||||
Deferred
contract costs
|
-
|
38,140
|
||||||
Total
current assets
|
2,976,390
|
967,370
|
||||||
Property
and equipment, net
|
626,440
|
477,643
|
||||||
Equipment
on lease, net
|
442,099
|
1,818
|
||||||
Other
assets
|
7,020
|
11,102
|
||||||
Total
assets
|
$
|
4,051,949
|
$
|
1,457,933
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$
|
718,316
|
$
|
614,365
|
||||
Accrued
expenses
|
561,009
|
224,078
|
||||||
Notes
payable, current
|
7,538
|
176,910
|
||||||
Unearned
revenue
|
8,882
|
96
|
||||||
Total
current liabilities
|
1,295,745
|
1,015,449
|
||||||
Long-term
liabilities
|
||||||||
Notes
payable, long-term
|
7,903
|
-
|
||||||
Other
long-term
|
132,055
|
223,906
|
||||||
Total
long-term liabilities
|
139,958
|
223,906
|
||||||
Stockholders’
equity
|
||||||||
Preferred
stock, $.001 par value: 2,000,000 shares authorized, no shares issued and
outstanding at October 31, 2008 and July 31, 2009
|
–
|
-
|
||||||
Common
stock, $.001 par value: 50,000,000 shares authorized, 15,138,376 and
15,733,376 shares issued at October 31, 2008 and July 31, 2009,
respectively
|
15,138
|
15,733
|
||||||
Additional
paid in capital
|
50,902,172
|
51,256,046
|
||||||
Treasury
stock, 400,000 shares at October 31, 2008 and July 31,
2009
|
(3,432,500
|
)
|
(3,432,500
|
)
|
||||
Accumulated
deficit
|
(44,868,564
|
)
|
(47,620,701
|
)
|
||||
Total
stockholders’ equity
|
2,616,246
|
218,578
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
4,051,949
|
$
|
1,457,933
|
The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements
F-22
STEELCLOUD,
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
July 31,
|
Nine Months Ended
July 31,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Products
|
$
|
57,228
|
$
|
88,518
|
$
|
1,863,083
|
$
|
188,319
|
||||||||
Services
|
846,215
|
193,187
|
1,954,564
|
971,945
|
||||||||||||
Total
revenues
|
903,443
|
281,705
|
3,817,647
|
1,160,264
|
||||||||||||
Cost
of revenues
|
||||||||||||||||
Products
|
34,152
|
35,502
|
1,569,694
|
87,226
|
||||||||||||
Services
|
675,966
|
126,997
|
1,596,479
|
740,555
|
||||||||||||
Total
cost of revenues
|
710,118
|
162,499
|
3,166,173
|
827,781
|
||||||||||||
Gross
profit
|
193,325
|
119,206
|
651,474
|
332,483
|
||||||||||||
Selling
and marketing
|
248,557
|
153,412
|
640,738
|
369,276
|
||||||||||||
Research
and product development
|
58,066
|
53,637
|
179,523
|
151,869
|
||||||||||||
General
and administrative
|
899,042
|
591,397
|
2,635,418
|
1,886,485
|
||||||||||||
Severance
and restructuring
|
-
|
-
|
-
|
73,205
|
||||||||||||
Operating
loss from continuing operations
|
(1,012,340
|
)
|
(679,240
|
)
|
(2,804,205
|
)
|
(2,148,352
|
)
|
||||||||
Interest
(expense) income, net
|
(5,825
|
)
|
(20,761
|
)
|
5,417
|
(20,351
|
)
|
|||||||||
Loss
from continuing operations before income taxes
|
(1,018,165
|
)
|
(700,001
|
)
|
(2,798,788
|
)
|
(2,168,703
|
)
|
||||||||
(Provision)
benefit for income taxes
|
(312,096
|
)
|
-
|
393,596
|
-
|
|||||||||||
Loss
from continuing operations
|
(1,330,261
|
)
|
(700,001
|
)
|
(2,405,192
|
)
|
(2,168,703
|
)
|
||||||||
Discontinued
Operations:
|
||||||||||||||||
Loss
from disposal of discontinued operations (net of applicable taxes of
$0)
|
-
|
(19,565
|
)
|
-
|
(19,565
|
)
|
||||||||||
Income
(loss) from discontinued operations, net of tax
|
388,575
|
(178,868
|
)
|
797,350
|
(563,869
|
)
|
||||||||||
Income
(loss) from discontinued operations
|
388,575
|
(198,433
|
)
|
797,350
|
(583,434
|
)
|
||||||||||
Net
loss
|
$
|
(941,686
|
)
|
$
|
(898,434
|
)
|
$
|
(1,607,842
|
)
|
$
|
(2,752,137
|
)
|
||||
Basic
and diluted (loss) income per share:
|
||||||||||||||||
Continuing
Operations
|
$
|
(0.09
|
)
|
$
|
(0.05
|
)
|
$
|
(0.17
|
)
|
$
|
(0.14
|
)
|
||||
Discontinued
Operations
|
0.03
|
(0.01
|
)
|
0.06
|
(0.04
|
)
|
||||||||||
Net
loss
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
$
|
(0.11
|
)
|
$
|
(0.18
|
)
|
||||
Weighted–average
shares outstanding:
|
||||||||||||||||
Basic
|
14,595,649
|
15,140,024
|
14,426,565
|
14,903,494
|
||||||||||||
Diluted
|
14,595,649
|
15,140,024
|
14,426,565
|
14,903,494
|
The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements
F-23
STEELCLOUD,
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
July 31,
|
||||||||
2008
|
2009
|
|||||||
Operating
activities
|
||||||||
Net
loss
|
$
|
(1,607,842
|
)
|
$
|
(2,752,137
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Loss
on disposal
|
-
|
19,565
|
||||||
Depreciation
and amortization
|
370,931
|
228,795
|
||||||
Stock-based
compensation
|
273,771
|
181,394
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
1,514,098
|
1,362,354
|
||||||
Inventory
|
1,527
|
174,533
|
||||||
Deferred
contract costs
|
52,217
|
(38,140
|
)
|
|||||
Prepaid
expenses and other assets
|
97,210
|
(122,998
|
)
|
|||||
Accounts
payable
|
(801,318
|
)
|
(103,951
|
)
|
||||
Unearned
revenue
|
(59,285
|
)
|
(8,786
|
)
|
||||
Accrued
expenses and other liabilities
|
(494,954
|
)
|
(146,358
|
)
|
||||
Net
cash used in operating activities
|
(653,645
|
)
|
(1,205,729
|
)
|
||||
Investing
activities
|
||||||||
Sale
of hardware integration business
|
-
|
150,000
|
||||||
(Purchase)
sale of property and equipment
|
(382,362
|
)
|
347,544
|
|||||
Net
cash (used in) provided by investing activities
|
(382,362
|
)
|
497,544
|
|||||
Financing
activities
|
||||||||
Proceeds
from exercise of common stock options
|
231,297
|
-
|
||||||
Proceeds
from the sale of common stock
|
-
|
87,500
|
||||||
Proceeds
from issuance of notes payable
|
-
|
250,000
|
||||||
Payments
on notes payable
|
(11,012
|
)
|
(15,456
|
)
|
||||
Net
cash provided by (used in) financing activities
|
220,285
|
322,044
|
||||||
Net
decrease in cash and cash equivalents
|
(815,722
|
)
|
(386,141
|
)
|
||||
Cash
and cash equivalents at beginning of period
|
2,622,654
|
752,351
|
||||||
Cash
and cash equivalents at end of period
|
$
|
1,806,932
|
$
|
366,210
|
||||
Supplemental
cash flow information
|
||||||||
Interest
paid
|
$
|
17,514
|
$
|
22,779
|
||||
Income
taxes paid
|
$
|
-
|
$
|
-
|
||||
Non-cash
investing and financing activities
|
$
|
-
|
$
|
85,575
|
The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements
F-24
1.
|
Nature of Business and Basis of
Presentation
|
Founded
in 1987, SteelCloud, Inc. (the “Company” or “SteelCloud”) is a developer of
mobility appliance software solutions primarily for the Research In Motion
(“RIM”) Blackberry market. SteelCloud designs and integrates its
software into specialized server appliances targeted at Department of Defense
(“DoD”), public sector, commercial, and remote hosting customers.
SteelCloud
has developed SteelWorks® (“SteelWorks”), an appliance solution specifically for
the BlackBerry Enterprise Server (“BES”). SteelWorks was developed in
conjunction with RIM. SteelWorks is an integrated server appliance
that enables virtually any size organization to implement the BES at a fraction
of the cost, time, and resource commitment. SteelCloud has filed for
patent protection for the SteelWorks technology it created for the installation
wizard, backup and restore features. These patents are currently
pending approval from the U.S. Patent and Trademark
Office. Additionally, SteelCloud developed SteelWorks FedMobile, a
BlackBerry Enterprise Server appliance solution specifically for the DoD and
other related agencies. The SteelWorks FedMobile appliance builds
upon SteelWorks by automating the application of the Defense Information Systems
Agency’s and DoD’s Security Technical Implementation Guide (“STIG”) to the BES
installation process. The STIG mandates the policies in accordance
with which the DoD and related agencies must operate their wireless
communications. As a result, SteelCloud’s FedMobile appliance allows
DoD organizations to implement a STIG compliant BES infrastructure in a fraction
of the time, cost, or resources necessary to what is otherwise a time intensive
and manual STIG process.
In
addition, the Company serves information technology end users directly, in both
the public and private sectors, with services focused on IT-centric
solutions. SteelCloud’s IT centric solutions consist primarily of
consulting and staff augmentation services.
As
further discussed in Note 2, SteelCloud sold its Federal and ISV integration
business on July 10, 2009.
The
following unaudited condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
“SEC”). Certain information and note disclosures, normally included in annual
financial statements prepared in accordance with U.S. Generally Accepted
Accounting Principles (“GAAP”), have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the Footnotes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended October 31, 2008, filed with the
SEC on February 12, 2009 and subsequently amended on March 4, 2009.
All
adjustments that are of a normal recurring nature, in the opinion of management,
which are necessary for a fair presentation for the periods presented have been
reflected as required by Regulation S-X, Rule 10-01.
The
Company’s consolidated financial statements for the three and nine months ended
July 31, 2009 do not give effect to any adjustments to recorded amounts and
their classifications, which would be necessary should the Company be unable to
continue as a going concern and therefore, be required to realize its assets and
discharge its liabilities in other than the normal course of business and at
amounts different from those reflected in the consolidated financial
statements.
Going
Concern
SteelCloud
has had recurring annual operating losses since its fiscal year ended October
31, 2004. SteelCloud expects that such losses will continue at least
through its fiscal year ending October 31, 2009. The report of
SteelCloud’s independent registered public accounting firm on SteelCloud’s
consolidated financial statements for the fiscal year ended October 31, 2008
contains an explanatory paragraph regarding SteelCloud’s ability to continue as
a going concern based upon its history of net losses.
F-25
SteelCloud
is dependent upon available cash and operating cash flow to meet its capital
needs. SteelCloud is considering all strategic options to improve its
liquidity and provide it with working capital to fund its continuing business
operations, including equity offerings, asset sales or debt; however, there can
be no assurance that SteelCloud will be successful in negotiating financing on
terms agreeable to it or at all. If adequate funds are not available
or are not available on acceptable terms, SteelCloud will likely not be able to
take advantage of unanticipated opportunities, develop or enhance services or
products, respond to competitive pressures, or continue as a going
concern. There is no assurance that SteelCloud will be successful in
raising working capital as needed. Further, there are no assurances
that SteelCloud will have sufficient funds to execute its business plan, pay its
operating expenses and obligations as they become due or generate positive
operating results or continue as a going concern.
SteelCloud
is in the process of executing on several restructuring initiatives which
include the following:
•
|
A
reorganization that included personnel terminations from all parts of the
organization;
|
|
•
|
Elimination
of all non-essential costs;
|
|
•
|
Reduction
of occupancy costs; and
|
|
•
|
Obtaining
capital or bridge financing.
|
While
SteelCloud believes that these initiatives will better align its costs with its
anticipated revenues going forward, it will take time for these initiatives to
have an impact on SteelCloud’s net revenue and operating
income. Furthermore, in reviewing its business strategies,
SteelCloud’s management has determined that it is in the Company’s best interest
to focus its resources and investments on its BlackBerry-related technologies
and products. The Company sold its hardware integration business on
July 10, 2009 and is evaluating other strategic alternatives with regards to
obtaining capital.
2.
|
Sale of Integration
Business
|
On July
10, 2009, SteelCloud entered into an Asset Purchase Agreement (the “Agreement”)
with NCS Technologies, Inc., a Virginia corporation (“NCS”), pursuant to which
SteelCloud agreed to sell to NCS, and NCS agreed to purchase from SteelCloud,
all of SteelCloud’s right, title and interest in and to the assets relating to
SteelCloud’s computer integration business. The purchase price
was $475,000 of which $150,000 was paid as a deposit and the remaining $325,000
is an earn-out amount, which is payable from and to the extent of revenue NCS
receives during the three-year period after the closing date from certain
existing and prospective clients, at a rate equal to 15% of the net sales price
received by NCS from such clients. Any payments by NCS to SteelCloud
are due on or before the tenth business day following the month in which NCS
receives the payments from the client(s).
The
Company has classified the hardware integration business as discontinued
operations in the statements of operations for the three and nine month periods
ending July 31, 2009 as well as all comparative periods
presented. Certain amounts have been reclassified in order to conform
with the current period presentation. Revenues from discontinued
operations for the three and nine months ended July 31, 2009 were $374,621 and
$1,581,036, respectively. Revenues from discontinued operations for the three
and nine months ended July 31, 2008 were $1,661,029 and $12,937,931,
respectively. Current assets and current liabilities of
discontinued operations at October, 31, 2008 were approximately $1.7 million and
$575,000, respectively. Total assets and total liabilities of
discontinued operations on October 31, 2008 were approximately $2.1 million and
$707,000, respectively. No assets or liabilities remain as of July
31, 2009.
F-26
3.
|
Recently Issued Accounting
Pronouncements
|
Effective
November 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) and
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS
157, which defines fair value, establishes a framework for measuring fair value
in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), and
expands disclosures about fair value measurements. SFAS 157 clarifies
that fair value is an exit price, representing the amount that would be received
to sell asset or paid to transfer a liability in an orderly transaction between
market participants. SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value with changes in fair
value recognized in earnings each period. For the three and nine month periods
ended July 31, 2009, the Company has elected not to use the fair value option
permitted under SFAS 159 for any of its financial assets and financial
liabilities that are not already recorded at fair value.
In
February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB
Statement No. 157” (“FSP 157-2”). FSP 157-2 deferred the effective
date of FAS 157 for all nonfinancial assets and nonfinancial liabilities to
fiscal years beginning after November 15, 2008. The Company is in the
process of evaluating the effect, if any, the adoption of FSP 157-2 will have on
its financial statements.
In
October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair
Value of a Financial Asset When the Market for that Asset is not Active” (“FSP
157-3”). FSP 157-3 provides guidance for determining the fair value
of a financial asset in an inactive market. The Company adopted FSP
157-3 for the quarter ended July 31, 2009. The adoption did not have
a material impact on the financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) “Business Combinations” (“SFAS No. 141R”). SFAS
No. 141R, which replaces SFAS No. 141, requires that the acquisition method of
accounting (which SFAS No. 141 called the “purchase method”) be used for all
business combinations and for an acquirer to be identified for each business
combination. SFAS No. 141R also establishes principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141R also requires that acquisition-related
costs be recognized separately from the business combination. SFAS
No. 141R will apply prospectively to business combinations for which the
acquisition date is after fiscal years beginning on or after December 15,
2008. The Company is in the process of evaluating the effect, if any,
the adoption of SFAS No. 141(R) will have on its financial statements , if the
Company undertakes an acquisition.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires all
entities to report noncontrolling (minority) interests in subsidiaries as equity
in the consolidated financial statements. Its intention is to
eliminate the diversity in practice regarding the accounting for transactions
between an entity and noncontrolling interests. This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company is in the process of evaluating the effect,
if any, the adoption of SFAS No. 160 will have on its financial
statements.
In May
2008, The FASB issued Statement of Financial Accounting Standards No.162 “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which
reorganizes the GAAP hierarchy. SFAS 162 is intended to improve
financial reporting by providing a consistent framework for determining what
accounting principles should be used in preparing GAAP financial
statements. With the issuance of SFAS 162, the FASB concluded that
the GAAP hierarchy should be directed toward the entity and not its auditor, and
reside in the accounting literature established by the FASB as opposed to the
American Institute of Certified Accountants Statement on Auditing Standards No.
69, “The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles”. SFAS 162 will become effective 60 days
following the SEC approval of the Public Accounting Oversight Board amendments
to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles” and is not expected to have any impact on the
Company’s financial statements.
F-27
In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165
is effective for interim or annual financial periods ending after June 15,
2009. The Company adopted SFAS 165 for the quarter ended July 31,
2009. Except for the required disclosures, there was no material
impact to the financial statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB-28-1, “Interim Disclosure about Fair
Value of Financial Instruments” (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments
that are within the scope of FAS 107, “Disclosures about the Fair Value of
Financial Instruments”. Additionally, FSP107-1/APB28-1 requires disclosure of
the methods and significant assumptions used to estimate the fair value of
financial instruments on an interim basis as well as changes of the methods and
significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change
the accounting treatment for these financial instruments and is effective for
interim reporting periods ending after June 15, 2009. The Company has adopted
FSP 107-1/APB 28-1 during the quarter ended July 31, 2009
and disclosed the fair value of its financial instruments in the
financial statements.
In April
2009, the FASB issued FSP 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairment” (FSP 115-2/124-2). FSP 115-2/124-2 amends the
requirements for the recognition and measurement of other-than-temporary
impairments for debt securities by modifying the pre-existing “intent and
ability” indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is
triggered when there is an intent to sell the security, it is more likely than
not the security will be required to be sold before recovery, or the security is
not expected to recover the entire amortized cost basis of the
security. Additionally, FSP 115-2/124-2 changes the presentation of
another-than-temporary impairment in the income statement for those impairments
involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other
comprehensive income. FSP 115-5 2/124-2 is effective for interim and annual
reporting periods ending after June 15, 2009. The Company has adopted FSP
107-1/APB 28-1 during the quarter ended July 31, 2009. The adoption
did not have a material impact on the financial statements.
4.
|
Loan and Note
Payable
|
On July
1, 2009, the Company entered into a Business Loan and Security Agreement with
Caledonia Capital Corporation, a Delaware corporation (the “Lender”) pursuant to
which the Lender agreed to lend to SteelCloud $250,000 in the form of a Secured
Promissory Note (the “Note”) which was issued on July 1, 2009 (the “Issuance
Date”). The Note bears interest at a rate of 15% per annum, and is
payable in quarterly installments commencing three months after the Issuance
Date, or October 1, 2009. The principal amount of the Note is due and
payable in full on December 29, 2009 (the “Maturity Date”). There are
no penalties for early prepayment of the Note.
Additionally,
in the event that the Company receives investments from one or more investors in
one or more transactions in an aggregate amount in excess of $750,000, whether
in the form of cash, negotiable or non-negotiable instruments or any form of
payment in exchange for the issuance of any certificated or non-certificated
security of the Company, whether in the form of debt or equity (an “Equity
Raise”), at any time between the Issuance Date and the Maturity Date, then, the
Company shall be required, within five (5) business days after the Equity Raise
first exceeds $750,000, to curtail the accrued interest and outstanding
principal balance of the Note by an amount equal to the amount by which the
Equity Raise then exceeds $750,000 (but in no event by more than the then
outstanding principal balance and interest accrued on the Note). Until delivery
of such funds to the Lender, all such funds shall be deemed held in trust by the
Company for and on behalf of the Lender. All funds that the Company
delivers to the Lender from the Equity Raise shall be deemed prepayments of the
Note.
Pursuant
to the Agreement and the Note, the Company’s obligations thereunder are secured
by a first priority lien in and to all of SteelCloud’s intellectual property
rights, title and interest in and to the SteelWorks® Mobile integrated server
appliance software.
F-28
As an
inducement to the Lender to make the loan to the Company, the Company issued to
the Lender a warrant to purchase up to 625,000 shares of SteelCloud’s common
stock, par value $0.001 per share. The Warrant is exercisable for
four years at an exercise price of $0.15 per share. The Company
determined the fair value of these warrants utilizing the Black-Sholes
method. The fair value of these warrants at issuance date was
approximately $130,000.
The loan
amount of $250,000 was allocated between the note payable and warrants based
upon their relative fair market values. The difference between the face amount
of the note of $250,000 and the note payable amount of $164,425 recorded at date
of execution represents the debt discount of $85,575 which will be amortized
over the life of the note. To determine the fair value of the
warrants, management used the Black-Scholes Model which includes assumptions on
the period end stock price, historical stock volatility, risk free interest rate
and term of warrants.
The fair
value of the loan at July 31, 2009 was approximately $180,035.
5.
|
Equity
|
Investment
On June
15, 2009, the Company sold an aggregate of 350,000 shares of its common stock,
$.001 par value, to its seven directors, for aggregate cash proceeds of
$87,500. The shares of common stock were sold at $0.25 per share, or $.01
higher than the closing price of the common stock on the date of
sale. Each share of common stock was accompanied by one warrant to
purchase one additional share of common stock (the “Warrant”). The
Warrants are exercisable for five years from the date of issuance at an exercise
price of $0.25 per share. The seven directors have entered into a
lock-up agreement with the Company, restricting their ability to exercise the
warrants until the Company receives shareholder approval for the issuance of the
Warrants.
Stock-based
Compensation
The
Company recognized approximately $53,000 and $110,000 of stock-based
compensation expense during the three month periods ended July 31, 2009 and
2008, respectively. Stock-based compensation expense for the
three-month period ended July 31, 2009 and 2008 increased the Company’s basic
and diluted loss per share by $0.01. The Company recognized
approximately $181,000 and $274,000 of stock-based compensation expense during
the nine month periods ended July 31, 2009 and 2008,
respectively. Stock-based compensation expense for the nine month
periods ended July 31, 2009 and 2008 decreased the Company’s basic and diluted
loss per share by $0.01. The estimated fair value of the Company’s
stock-based awards is amortized on a straight-line basis over the awards’
original service period.
F-29
On
February 28, 2009, the Company entered into an Employment Agreement Amendment
with Kevin Murphy, the Company’s current Chief Financial Officer in which Mr.
Murphy agreed to forfeit options to purchase an aggregate of 225,000 shares of
the Company’s common stock, $0.001 par value per share and instead entered into
separate Incentive Stock Option and Restricted Stock agreements with the
Company. Pursuant to the Incentive Stock Option agreement Mr. Murphy
was granted an option to purchase 150,000 shares of common stock, which shall
vest quarterly in arrears over a one year period. Pursuant to the
Restricted Stock Agreement with the Company, Mr. Murphy shall receive 90,000
shares of restricted stock which shall vest ratably over 12 months, or 7,500
shares per month, so long as Mr. Murphy is employed by the Company on the last
day of each month. The cancellation and reissuance of equity awards
to Mr. Murphy was treated as a modification of Mr. Murphy’s forfeited awards in
accordance with SFAS No. 123R.
Restricted
Stock
During
the nine month period ended July 31, 2009, the Company granted 546,000 shares of
restricted common stock pursuant to its Amended 2007 Stock Option and Restricted
Stock Plan. The Company did not grant any restricted stock for the
three month periods ended July 31, 2009 and July 31, 2008 or the nine month
period ended July 31, 2008. The fair value of the restricted stock
was determined based upon the closing stock price on the date of
grant. The restricted stock grants vest quarterly over a one year
period. As of July 31, 2009, 150,000 of the restricted stock grants
vested. The Company’s restricted stock grants are accounted for as
equity awards and are recognized on a straight-line basis over the requisite
service period. The Company’s restricted stock agreements do not
contain any post-vesting restrictions. For the three and nine month
periods ended July 31, 2009, the Company recognized $32,000 and $109,000,
respectively, of stock-based compensation expense associated with these
restricted stock awards.
Additional
Paid-in Capital
Additional
paid in capital has increased approximately $354,000 during the nine month
period ended July 31, 2009 due to $181,000 of stock based
compensation expense, $86,000 due to the issuance of warrants and $87,500 due to
sales of common stock.
6.
|
Inventories
|
Inventories
consisted of the following:
October 31,
|
July 31,
|
|||||||
2008
|
2009
|
|||||||
Raw
materials
|
$
|
344,898
|
$
|
80,451
|
||||
Work
in process
|
-
|
-
|
||||||
Finished
goods
|
177,022
|
31,006
|
||||||
$
|
521,920
|
$
|
111,457
|
F-30
7.
|
Earnings per
Share
|
Basic
earnings per share is based on the weighted average number of common shares
outstanding during the period and is calculated by dividing the net earnings
(loss) by the weighted average number of common shares outstanding. Diluted
earnings per share is based on the weighted average number of common shares
outstanding plus common stock equivalents associated with stock options and
warrants and is calculated by dividing net earnings by the weighted average
number of common shares outstanding used in the basic earnings per share
calculation plus the common stock equivalent of stock options and warrants. The
dilutive weighted average number of common stock outstanding excluded potential
common stock from stock options and warrants of approximately 128,000 and
340,000 for the three month periods ended July 31, 2009 and 2008, respectively,
and 128,000 and 404,000 for the nine month periods ended July 31, 2009 and 2008,
respectively. These shares were excluded from the earnings per share
calculation due to their antidilutive effect resulting from the loss from
operations.
8.
|
Income
Tax
|
In the
three and nine month periods ended July 31, 2008, the Company recorded an income
tax benefit attributable to discontinued operations of $(312,096) and income tax
expense from discontinued operations of $393,596. In accordance with
intra-period tax allocation rules the Company recorded a corresponding income
tax expense on continuing operations $312,396 and income tax benefit on
continuing operations of $(393,596) for the three and nine month periods ended
July 31, 2008. The income tax benefit from discontinued operations in
the three month period ended July 31, 2008 was due to a significant decrease in
the Company’s estimated taxable income for discontinued operations for the
fiscal year ended October 31, 2008.
On
November 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition
threshold that a tax position is required to meet before being recognized in the
financial statements and provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition issues. The Company has an unrecognized tax
benefit of approximately $61,000 and does not expect any of this amount to
reverse in the next twelve months. The amount of unrecognized tax
benefits that, if recognized, would impact the effective tax rate is
$0.
The
Company conducts business in the U.S. and is subject to tax in that
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the respective federal and state tax
authorities. For income tax returns filed by the Company, the Company is no
longer subject to U.S. federal, or state tax examination by tax authorities for
years before October 31, 2006, although carryforward tax attributes that were
generated prior to October 31, 2006 may still be adjusted upon examination by
tax authorities if they either have been or will be utilized. The
Company’s accounting policy is to recognize interest and penalties related to
income tax matters in general and administrative expense. The Company had $0
accrued for interest and penalties as of July 31, 2009.
9.
|
Commitments and
Contingencies
|
The
Company has accrued approximately $51,000 pertaining to payroll taxes and
related interest resulting from the failure to report certain employee
reimbursements as compensation. The Company has filed the necessary
returns. The Company has retained the contingency to account for
additional taxes, interest and penalties that may be assessed.
10.
|
Subsequent
Events
|
The
Company has evaluated subsequent events through September 14, 2009.
NASDAQ Listing
On March
23, 2009, the Company received notice, under NASDAQ Marketplace Rule 4310(c)(3),
that its common stock was subject to potential delisting from the NASDAQ Capital
Market because the Company did not meet the criteria of NASDAQ Listing Rule
5550(b) (the “Rule”) and did not have a minimum of $2,500,000 in stockholders’
equity, $35,000,000 market value of listed securities, or $500,000 of net income
from continuing operations for the most recently completed fiscal year or two of
the three most recently completed fiscal years. The Company provided
NASDAQ with a specific plan of how it intended to achieve and sustain compliance
with all the NASDAQ Capital Market listing requirements, including a time frame
for completion of such plan. The plan included the following two
strategies: (i) increasing our stockholders equity in excess of the minimum
$2,500,000 requirement by raising between $3,000,000 to $4,000,000 through an
equity transaction; and (ii) identifying a strategic partner interested in
either merging with or acquiring the Company. On April 28, 2009 the
Company received notice from NASDAQ indicating that NASDAQ had granted the
Company’s request for an extension of time to regain compliance with the
Rule. Pursuant to the terms of the extension, the Company was
required to: (a) on or before July 6, 2009, complete an equity transaction or a
merger and/or acquisition, and (b) make appropriate disclosures to the SEC and
NASDAQ on a Form 8-K. The Company was not able to complete an equity
transaction or a merger and/or acquisition by July 6, 2009, and on July 8, 2009,
the Company received written notification from NASDAQ stating that it did not
meet the terms of the extension, and that, as a result, the Company’s common
stock would be subject to suspension from trading at the opening of business on
July 17, 2009, and delisted from NASDAQ. The notification stated that
a hearing request made to the NASDAQ Hearing Panel (the “Panel”) to appeal the
determination would stay the delisting of the Company’s common stock pending the
Panel’s decision. On July 15, 2009, the Company requested a hearing
to appeal the determination before the Panel and to present its plan for
regaining compliance with the Rule (the “Appeal”). On August 4, 2009,
the Company received notice that NASDAQ received its Appeal, and that the
delisting action has been stayed, pending a final written decision by the Panel
after an oral/written hearing (the “Hearing”), where the Company was required to
demonstrate its ability to regain and sustain compliance with the
Rule. The Hearing was held at 11:00 A.M. EST, on September 3, 2009.
The Company presented its updated plan of compliance to the Panel on that
date. The Company is awaiting response from the Panel regarding the
determination of its appeal. There can be no assurance that the Panel
will grant the Company’s request for continued listing.
F-31
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain
statements contained herein may constitute forward-looking statements within the
meaning of Section 27A of the Securities Act, Section 21E of the
Exchange Act and the Private Securities Litigation Reform Act of
1995. Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results
to differ materially include, but are not limited to, our ability to obtain
financing in the short term, risks associated with the integration of businesses
following an acquisition, concentration of revenue from one source, competitors
with broader product lines and greater resources, emergence into new markets,
the termination of any of our significant contracts or partnerships, our
inability to maintain working capital requirements to fund future operations or
our inability to attract and retain highly qualified management, technical and
sales personnel.
You
should read the following discussion and analysis in conjunction with the
audited Financial Statements and Footnotes attached thereto, and the other
financial information appearing elsewhere in this prospectus.
OVERVIEW
Founded
in 1987, we are a developer of mobility appliance software solutions primarily
for the Research In Motion® (“RIM”) BlackBerry market. We design and integrate
our software into specialized server appliances targeted at the Federal
Government and in particular the Department of Defense (“DoD”), public
sector, commercial, and remote hosting customers.
BlackBerry®
Enterprise Server Solution (SteelWorks® Mobile)
We
developed SteelWorks® Mobile (“SteelWorks Mobile”), an appliance solution
specifically for the BlackBerry Enterprise Server (“BES”). SteelWorks
Mobile was developed in conjunction with RIM. SteelWorks
Mobile is an integrated server appliance that enables virtually any size
organization to implement the BES at a fraction of the cost, time, and resource
commitment. We have filed for patent protection for the SteelWorks
Mobile technology we created for the installation wizard, backup and restore
features. These patents are currently pending approval from the U.S.
Patent and Trademark Office.
In
addition, we developed SteelWorks FedMobile, our BlackBerry Enterprise Server
appliance solution specifically for the DoD and other related
agencies. The SteelWorks FedMobile appliance builds upon SteelWorks
Mobile by automating the application of the Defense Information Systems Agency’s
and DoD’s Security Technical Implementation Guide (“STIG”) to the BES
installation process. The STIG mandates the policies for which the
DoD and related agencies must operate their wireless
communications. As a result, our FedMobile appliance allows DoD
organizations to implement a STIG compliant BES infrastructure in a fraction of
the time, cost, or resources necessary to what is otherwise a time intensive and
manual STIG process.
Federal
Systems Integrator/Independent Software Vendors
Until
July 10, 2009, federal integrators outsourced their specialized requirements to
us and considered us to be an integral part of their product and service
delivery capability. We designed and manufactured specialized
embedded and integrated computing systems that were the foundation upon which
the integrators developed and delivered their application software.
On
July 10, 2009, we entered into an Asset Purchase Agreement, referred to as the
“Agreement”, with NCS Technologies, Inc., a Virginia corporation, referred to as
“NCS”, pursuant to which we agreed to sell to NCS, and NCS agreed to purchase
from us, all of our right, title and interest in and to the assets relating to
our computer integration business (comprised of our Federal Systems Integrator
business and the Independent Software Vendors business). The purchase
price was $475,000, subject to post-closing adjustments as set forth in the
Agreement. Please see “Liquidity and
Capital Resources” at page 32 for additional
information.
Professional
Services
We
provide information technology (“IT”) consulting and contract staffing solutions
for our commercial and government clients. Our consultants are
subject matter experts in network infrastructure complexities and security
technologies including firewalls, content inspection, intrusion detection, spam
and vulnerability scanning. For our contract staffing solutions, our
personnel function as “virtual” employees, performing work directly under the
auspices of client management and serve as an extension of the client’s in-house
staff resources.
22
RESULTS
OF OPERATIONS
Fiscal
Year Ended October 31, 2008 Compared To Fiscal Year Ended October 31,
2007 :
Net
Revenue Discussion:
The
following table summarizes our net revenue for the fiscal years ended October
31, 2007 and 2008 in dollars and as a percentage of net revenues.
Fiscal Year Ended October 31,
|
||||||||||||||||||||||||
2007
|
2008
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Products
|
$
|
21,421,129
|
91.87
|
%
|
$
|
16,333,600
|
85.88
|
%
|
$
|
(5,087,529
|
)
|
(23.75
|
)%
|
|||||||||||
Services
|
1,894,551
|
8.13
|
%
|
2,685,296
|
14.12
|
%
|
790,745
|
41.74
|
%
|
|||||||||||||||
Total
net revenues
|
$
|
23,315,680
|
100.00
|
%
|
$
|
19,018,896
|
100.00
|
%
|
$
|
(4,296,784
|
)
|
(18.43
|
)%
|
The
decrease in product revenue is primarily attributable to a decrease in our
integrator business as a result of certain program delays and a reduction in
purchases from our ISV customers. The current economic downturn has
prolonged the award of the integrator programs, as well as affected the amount
purchased by our ISV customers. We plan for revenue to grow as we
continue to focus our resources on our chosen markets and our end user solution
line of products.
The
increase in service revenue is the result of to new client acquisitions as a
result of the Company expanding its service offerings. We expect
service revenue to continue to grow in the future.
Gross
Profit Discussion:
The
following table summarizes our gross profit for the fiscal years ended October
31, 2007 and 2008 in dollars, as a percentage of gross profit and as a
percentage of net revenues.
Fiscal Year Ended October 31,
|
||||||||||||||||||||||||
2007
|
2008
|
Increase (decrease)
|
||||||||||||||||||||||
% of
Gross
|
% of
Gross
|
|||||||||||||||||||||||
Dollars
|
Profit
|
Dollars
|
Profit
|
Dollars
|
Percentage
|
|||||||||||||||||||
Products
|
$
|
4,356,274
|
88.09
|
%
|
$
|
2,569,499
|
83.02
|
%
|
$
|
(1,786,775
|
)
|
(41.02
|
)%
|
|||||||||||
Products
– GP%
|
20.34
|
%
|
15.73
|
%
|
||||||||||||||||||||
Services
|
588,947
|
11.91
|
%
|
525,543
|
16.98
|
%
|
(63,404
|
)
|
(10.77
|
)%
|
||||||||||||||
Services
– GP%
|
31.09
|
%
|
19.57
|
%
|
||||||||||||||||||||
Total
gross profit
|
$
|
4,945,221
|
100.00
|
%
|
$
|
3,095,042
|
100.00
|
%
|
$
|
(1,850,179
|
)
|
(37.41
|
)%
|
|||||||||||
Total
– GP%
|
21.21
|
%
|
16.27
|
%
|
The
decrease in product gross margin percentage is largely attributable to
maintaining our production facility at normal capacity in anticipation of
receiving the delayed integrator contracts. We expect gross profit as
a percentage of net revenues to continue to fluctuate from quarter to quarter as
product lines expand, new products are brought to market, start up costs are
incurred and new discounts, incentives and rebates become
available.
23
The
decrease in services gross profit percentage is attributable to our incurring
costs associated with obtaining new clients. We have been successful
in expanding our customer base during fiscal year 2008 as compared to fiscal
year 2007, which contributed to an increase in services revenue. We
will continue to incur lower initial margins as we expand into new markets and
increase our service offerings. We anticipate gross profit for
services to fluctuate in future quarters as we continue to realign and grow the
services division.
Operating
Expense Discussion:
The
following table summarizes our operating expenses for the fiscal years ended
October 31, 2007 and 2008 in dollars and as a percentage of net
revenues.
Fiscal Year Ended October 31,
|
||||||||||||||||||||||||
2007
|
2008
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Selling
and marketing
|
$
|
1,614,817
|
6.93
|
%
|
$
|
1,259,416
|
6.62
|
%
|
$
|
(355,401
|
)
|
(22.01
|
)%
|
|||||||||||
General
and administrative
|
4,315,254
|
18.51
|
%
|
3,901,499
|
20.51
|
%
|
(413,755
|
)
|
(9.59
|
)%
|
||||||||||||||
Research
and product development
|
661,550
|
2.84
|
%
|
702,231
|
3.69
|
%
|
40,681
|
6.15
|
%
|
|||||||||||||||
Severance
and restructuring costs
|
317,548
|
1.36
|
%
|
-
|
-
|
(317,548
|
)
|
(100.00
|
)%
|
|||||||||||||||
Total
operating expenses
|
$
|
6,909,169
|
29.63
|
%
|
$
|
5,863,146
|
30.83
|
%
|
$
|
(1,046,023
|
)
|
(15.14
|
)%
|
The
decrease in selling and marketing expenses is the result of aligning expenses to
our current and future business models during fiscal year
2008. During fiscal year 2008, marketing activities, specifically in
the area of marketing campaigns and tradeshows, and expense associated with
selling and marketing personnel decreased as a result of our cost cutting
efforts. Selling and marketing expenses have been kept in line with
projected revenue. We will continue to evaluate our costs relative to
our revenues and gross margins.
General
and administrative expenses decreased as a result of cost cutting efforts
incurred during fiscal year 2008 as compared to fiscal year 2007. The
cost reductions continue to include curtailing expenses related to non-revenue
generating activities, terminating non-essential employees, and instituting
across the board departmental expense reductions. Our cost reductions
were offset by approximately $202,000 of fees incurred related to us
implementing FIN 48 for the fiscal year 2008. Although we continue to
manage our costs relative to our revenues and gross margins, additional
resources may be required in order to invest in our federal integrator, ISV, and
SteelWorks® Mobile business.
Research
and development expenses have remained consistent as we continue to make
investments in our SteelWorks® mobile products as well as bringing new
products to market. We continue to make investments in research and
product development to maintain and enhance current products. We
believe that research and product development expenses will fluctuate from
quarter to quarter as new products are being developed and introduced into the
marketplace.
The
decrease in severance and restructuring charges for the twelve months ended
October 31, 2008 compared to the twelve months ended October 31, 2007 is the
result of incurring approximately $318,000 of non recurring costs associated
with the employment resignation agreement entered into with our previous CEO
during fiscal year 2007.
24
Other
Income (Expense) Discussion:
The
following table summarizes our other income (expense) for the fiscal years ended
October 31, 2007 and 2008 in dollars and as a percentage of net
revenues.
Fiscal Year Ended October 31,
|
||||||||||||||||||||||||
2007
|
2008
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Interest
income net
|
$
|
19,353
|
0.08
|
%
|
$
|
8,542
|
0.04
|
%
|
$
|
(10,811
|
)
|
(55.86
|
)%
|
|||||||||||
Total
interest income, net
|
$
|
19,353
|
0.08
|
%
|
$
|
8,542
|
0.04
|
%
|
$
|
(10,811
|
)
|
(55.86
|
)%
|
The
decrease in net interest expense for fiscal year 2008 is due to lower interest
income attributable to lower cash balances and interest rates earned over the
twelve months ended October 31, 2008 compared to the same period in fiscal year
2007.
Net
(Loss) Discussion:
The
following table summarizes our net (loss) for the fiscal years ended October 31,
2007 and 2008 in dollars and as a percentage of net revenues.
Fiscal Year Ended October 31,
|
||||||||||||||||||||||||
2007
|
2008
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Net
(loss)
|
$
|
(1,944,595
|
)
|
8.34
|
%
|
$
|
(2,759,562
|
)
|
14.51
|
%
|
$
|
814,967
|
41.91
|
%
|
The
increase in net loss for the twelve months ended October 31, 2008 as compared to
the same period in fiscal 2007 is the result of lower revenues and corresponding
gross margin dollars. We have instituted a conservative revenue and
cost of goods sold plan to minimize our net loss in fiscal year
2009. This plan also includes company-wide personnel terminations and
the elimination of all non-essential costs to reduce our operating expenses for
the upcoming year.
For the three months ended
July 31, 2009 compared to the three months ended July 31, 2008
:
Net
Revenue Discussion:
The
following table summarizes our net revenue for the three months ended July 31,
2008 and 2009 in dollars and as a percentage of net revenues.
Three Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Products
|
$
|
57,228
|
6.33
|
%
|
$
|
88,518
|
31.42
|
%
|
$
|
31,290
|
54.68
|
%
|
||||||||||||
Services
|
846,215
|
93.67
|
%
|
193,187
|
68.58
|
%
|
(653,028
|
)
|
(77.17
|
)%
|
||||||||||||||
Total net
revenues
|
$
|
903,443
|
100.00
|
%
|
$
|
281,705
|
100.00
|
%
|
$
|
(621,738
|
)
|
(68.82
|
)%
|
The
increase in product revenue is primarily attributable to the introduction of our
new SteelWorks Mobile appliances. Fiscal year 2008 product revenues
relate to other technology products that are not related to the SteelWorks
Mobile appliances. Accordingly, we experienced 100% growth in this
appliance product in fiscal 2009. The SteelWorks Mobile appliance was
launched in early fiscal 2009 and we anticipate sales will increase in future
periods as demand for the product increases.
The
decrease in service revenue for the three-month period ended July 31, 2009 as
compared to the same period in fiscal 2008 is the result of our completing a
fiscal 2008 large services contract in December 2008. We anticipate
service revenues will continue to fluctuate in future periods given the current
economic environment.
Gross
Profit Discussion:
The
following table summarizes our gross profit for the three months ended July 31,
2008 and 2009 in dollars, as a percentage of gross profit and as a percentage of
net revenues.
Three Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase (decrease)
|
||||||||||||||||||||||
% of
Gross
|
% of
Gross
|
|||||||||||||||||||||||
Dollars
|
Profit
|
Dollars
|
Profit
|
Dollars
|
Percentage
|
|||||||||||||||||||
Products
|
$
|
23,076
|
11.94
|
%
|
$
|
53,016
|
44.47
|
%
|
$
|
29,940
|
129.75
|
%
|
||||||||||||
Products
- GM%
|
40.32
|
%
|
59.89
|
%
|
||||||||||||||||||||
Services
|
170,249
|
88.06
|
%
|
66,190
|
55.53
|
%
|
(104,059
|
)
|
(61.12
|
)%
|
||||||||||||||
Services
– GM%
|
20.12
|
%
|
34.26
|
%
|
||||||||||||||||||||
Total
gross profit
|
$
|
193,325
|
100.00
|
%
|
$
|
119,206
|
100.00
|
%
|
$
|
(74,119
|
)
|
(38.34
|
)%
|
|||||||||||
Total
– GM%
|
21.40
|
%
|
42.32
|
%
|
25
The
increase in product gross profit percentage for the three months ended July 31,
2009 as compared to the same period in fiscal 2008 is primarily the result of
our new SteelWorks Mobile appliance. Given the amount of intellectual
property and software created and developed for this product, we will achieve
significantly higher product gross margins as compared to the hardware
integration business. We anticipate that the gross product margins
will fluctuate from quarter to quarter based on new functions and features
created for the product. We believe that our gross margin percentage
for our SteelWorks Mobile family of products will be between 40% and
60%.
The
increase in services gross profit for the three months ended July 31, 2009 as
compared to the same period in fiscal 2008 is primarily attributable to the
completion of a low margin services contract in December 2008.
Operating
Expense Discussion:
The
following table summarizes our operating expenses for the three months ended
July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
Three Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Selling
and marketing
|
$
|
248,557
|
27.51
|
%
|
$
|
153,412
|
54.46
|
%
|
$
|
(95,145
|
)
|
(38.28
|
)%
|
|||||||||||
Research
and product development
|
58,066
|
6.43
|
%
|
53,637
|
19.04
|
%
|
(4,429
|
)
|
(7.63
|
)%
|
||||||||||||||
General
and administrative
|
899,042
|
99.51
|
%
|
591,397
|
209.93
|
%
|
(307,645
|
)
|
(34.22
|
)%
|
||||||||||||||
Total
operating expenses
|
$
|
1,205,665
|
133.45
|
%
|
$
|
798,446
|
283.43
|
%
|
$
|
(407,219
|
)
|
(33.78
|
)%
|
The
decrease in selling and marketing expense is the result of aligning expenses to
our current and future business models to focus on our SteelWorks Mobile
products. For the three months ended July 31, 2009 compared to the three months
ended July 31, 2008, marketing activities and expenses associated with selling
and marketing personnel decreased as a result of cost cutting
efforts. We anticipate our sales and marketing costs will increase in
future periods in order to create demand for our new products.
The
research and product development expense for the three months ended July 31,
2009 slightly decreased compared to the three months ended July 31,
2008. We continue to make research and development investment into
our SteelWorks Mobile family of products. We anticipate that these
research and development costs will continue in future periods.
The
decrease in general and administrative expenses for the three months ended July
31, 2009 compared to the three months ended July 31, 2008 is primarily
attributable to a reduction in operating costs once the sale of our hardware
integration business was complete. Furthermore, we have significantly
reduced our operating expenses from the prior year specifically relating to
rent, personnel, insurance and other corporate costs. We have reduced
our overhead and personnel costs given the reduction of the business as certain
positions and resources are no longer needed to maintain
operations.
26
Other
Income (Expense) Discussion:
The
following table summarizes our other income (expense) for the three months ended
July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
Three Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
(Increase) decrease
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Interest
expense
|
$
|
(5,825
|
)
|
0.65
|
%
|
$
|
(20,761
|
)
|
7.37
|
%
|
$
|
(14,936
|
)
|
(256.4
|
)%
|
The
increase in net interest expense for the three-month period ended July 31, 2009
is the result of us executing a loan from Caledonia Capital Corporation on July
1, 2009. The note bears an annual interest rate of 15% payable on
October 1, 2009 and December 29, 2009. In addition, we have accrued
interest associated with the settlement with our former landlord on May 22,
2009. Interest on the settlement accrues at an annual rate of
18%.
The
following table summarizes our income tax expense for the three months ended
July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
Three Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase (decrease)
|
||||||||||||||||||||||
Dollars
|
% of Net
Revenues
|
Dollars
|
% of Net
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Income
Tax Expense
|
$
|
312,096
|
34.55
|
%
|
$
|
-
|
0.00
|
%
|
$
|
(312,096
|
)
|
(100.00
|
)%
|
In the
three month period ended July 31, 2008 we recorded an income tax benefit
attributable to discontinued operations and income tax expense on continuing
operations in accordance with intraperiod tax allocation rules. The income tax
benefit was due to a significant decrease in our estimated taxable income for
discontinued operations for the fiscal year ended October 31,
2008. As such, we adjusted our income tax expense for the three month
period ended July 31, 2008 to reflect our change in estimates.
Loss
from Continuing Operations Discussion:
The
following table summarizes our loss from continuing operations for the three
months ended July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
Three Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
(Increase) decrease
|
||||||||||||||||||||||
Dollars
|
% of Net
Revenues
|
Dollars
|
% of Net
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Loss
from continuing operations
|
$
|
(1,330,261
|
)
|
(147.24
|
)%
|
$
|
(898,434
|
)
|
(318.93
|
)%
|
$
|
431,827
|
32.46
|
%
|
The
decrease in our loss from continuing operations for the three months ended July
31, 2009 as compared to the same period in fiscal 2008 is a result of increasing
our gross margins and reduction of operating costs.
Income
(loss) from Discontinued Operations Discussion:
The
following table summarizes our income (loss) from discontinued operations for
the three months ended July 31, 2008 and 2009 in dollars and as a percentage of
net revenues.
Three Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
(Increase) decrease
|
||||||||||||||||||||||
Dollars
|
% of Net
Revenues
|
Dollars
|
% of Net
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Income
(loss) from discontinued operations
|
$
|
388,575
|
23.39
|
%
|
$
|
(198,433
|
)
|
52.97
|
%
|
$
|
(587,008
|
)
|
(48.93
|
)%
|
During
the 2008 fiscal year, we had several significant hardware integration contracts
which produced income. Given the overall downward economic climate,
we experienced contract delays, non-renewals and order constriction in our
commercial business. As a result of the continuing declines in
revenues as well as the cumulative losses, we determined to discontinue our
hardware integration business in the third quarter of the 2009 fiscal
year.
For The Nine Months Ended
July 31, 2009 Compared To The Nine Months Ended July 31,
2008:
The
overall economic downturn has impacted virtually every area of our business. As
a result, on July 10, 2009, we sold our hardware integration business to NCS.
Accordingly, we have reclassified amounts associated with this business as
discontinued operations. The discussion below represents our analysis of the
continuing operations. Discontinued operations are also discussed below,
separately.
27
The
following table summarizes our net revenue for the nine months ended July 31,
2008 and 2009 in dollars and as a percentage of net revenues.
Nine Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Products
|
$
|
1,863,083
|
48.80
|
%
|
$
|
188,319
|
16.23
|
%
|
$
|
(1,674,764
|
)
|
(89.89
|
)%
|
|||||||||||
Services
|
1,954,564
|
51.20
|
%
|
971,945
|
83.77
|
%
|
(982,618
|
(50.27
|
)%
|
|||||||||||||||
Total net
revenues
|
$
|
3,817,647
|
100.00
|
%
|
$
|
1,160,264
|
100.00
|
%
|
$
|
(2,657,383
|
)
|
(69.61
|
)%
|
The
decrease in product revenue is primarily attributable to sales of ancillary
product revenues in fiscal 2008 to existing customers that were not included in
the sale of the hardware integration business. Given the new focus of
our business in fiscal 2009, we do not anticipate a significant portion of our
revenues to be generated from ancillary technology products that are not focused
around the SteelWorks Mobile product line, however, we will continue to support
our existing customers and may sell products outside of our SteelWorks Mobile
product line from time to time. Given the foregoing, SteelWorks
Mobile revenue increased 100% in fiscal 2009 compared to fiscal
2008.
The
decrease in service revenue for the nine month period ended July 31, 2009 as
compared to the same period in fiscal 2008 is the result of us completing a
large services contract in December 2008. We anticipate service
revenues to fluctuate in future periods as the current economic climate
improves.
Gross
Profit Discussion:
The
following table summarizes our gross profit for the nine months ended July 31,
2008 and 2009 in dollars, as a percentage of gross profit and as a percentage of
net revenues.
Nine Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase (decrease)
|
||||||||||||||||||||||
% of
Gross
|
% of
Gross
|
|||||||||||||||||||||||
Dollars
|
Profit
|
Dollars
|
Profit
|
Dollars
|
Percentage
|
|||||||||||||||||||
Products
|
$
|
293,388
|
91.45
|
%
|
$
|
101,092
|
30.04
|
%
|
$
|
(192,296
|
)
|
(65.54
|
)%
|
|||||||||||
Products
- GM%
|
15.75
|
%
|
53.68
|
%
|
||||||||||||||||||||
Services
|
358,084
|
8.55
|
%
|
231,390
|
69.59
|
%
|
(126,694
|
)
|
(35.38
|
)%
|
||||||||||||||
Services
– GM%
|
18.32
|
%
|
23.81
|
%
|
||||||||||||||||||||
Total
gross profit
|
$
|
651,472
|
100.00
|
%
|
$
|
332,482
|
100.00
|
%
|
$
|
(318,990
|
)
|
(48.96
|
)%
|
|||||||||||
Total
– GM%
|
17.06
|
%
|
28.66
|
%
|
The
significant increase in gross profit percentage for the nine months ended July
31, 2009 as compared to the same period in fiscal 2008 is the result of our
SteelWorks Mobile sales. The product was launched in early fiscal
2009. Given the significant intellectual property and software we
have created and developed for this product, we anticipate margins will continue
to improve in future periods.
28
The
increase in services gross profit for the nine months ended July 31, 2009 as
compared to the same period in fiscal 2008 is primarily attributable to the
completion of a low margin services contract in December 2008.
Operating
Expense Discussion:
The
following table summarizes our operating expenses for the nine months ended July
31, 2008 and 2009 in dollars and as a percentage of net revenues.
Nine Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Selling
and marketing
|
$ | 640,738 | 16.78 | % | $ | 369,276 | 31.83 | % | $ | (271,462 | ) | (42.37 | )% | |||||||||||
Research
and product development
|
179,523 | 4.70 | % | 151,869 | 13.09 | % | $ | (27,654 | ) | (15.40 | )% | |||||||||||||
General
and administrative
|
2,635,418 | 69.03 | % | 1,886,485 | 162.59 | % | $ | (748,933 | ) | (28.42 | )% | |||||||||||||
Severance
and restructuring
|
- | 0.00 | % | 73,205 | 6.31 | % | $ | 73,205 | 100.00 | % | ||||||||||||||
Total
operating expenses
|
$ | 3,455,679 | 90.52 | % | $ | 2,480,835 | 213.82 | % | $ | (974,844 | ) | (28.21 | )% |
The
decrease in selling and marketing expense is the result of aligning expenses to
our current and future business models to focus on our SteelWorks Mobile
products. For the nine months ended July 31, 2009 compared to the nine months
ended July 31, 2008, marketing activities and expense associated with selling
and marketing personnel decreased as a result of cost cutting
efforts. We anticipate our sales and marketing costs will increase in
future periods in order to create demand for our new products.
The
research and product development expense for the nine months ended July 31, 2009
slightly decreased compared to the nine months ended July 31,
2008. We continue to make research and development investment into
our SteelWorks Mobile family of products. We anticipate that these
research and development costs will continue in future periods.
The
decrease in general and administrative expenses for the nine months ended July
31, 2009 compared to the nine months ended July 31, 2008 is primarily
attributable to a reduction in operating costs once the sale of our hardware
integration business was complete. Furthermore, we have significantly
reduced our operating expenses from the prior year specifically relating to
rent, personnel, insurance and other corporate costs. We have reduced our
overhead and personnel costs given the reduction of the business as certain
positions and resources are no longer needed to maintain
operations.
We did
not incur any severance or restructuring costs in fiscal 2008. As
such, these costs increased 100% in fiscal 2009 compared to fiscal
2008.
29
Other
Income (Expense) Discussion:
The
following table summarizes our other income (expense) for the nine months ended
July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
Nine Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
(Increase) decrease
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Interest
income (expense)
|
$
|
5,417
|
0.14
|
%
|
$
|
(20,351
|
)
|
1.75
|
%
|
$
|
(25,768
|
)
|
(475.69
|
)%
|
The
increase in net interest expense for the nine month period ended July 31, 2009
is the result of the execution of a loan from Caledonia Capital
Corporation on July 1, 2009. The note bears an annual interest rate
of 15% payable on October 1, 2009 and December 29, 2009. In addition,
we have accrued interest associated with our settlement with our former landlord
on May 22, 2009. Interest on the settlement accrues at an
annual rate of 18%.
Income
Tax (Benefit):
The
following table summarizes our income tax benefit for the nine months ended July
31, 2008 and 2009 in dollars and as a percentage of net revenues.
Nine
Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase
(decrease)
|
||||||||||||||||||||||
Dollars
|
%
of Net
Revenues
|
Dollars
|
%
of Net
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Income
Tax Benefit
|
$
|
(393,596
|
)
|
10.31
|
%
|
$
|
-
|
0.00
|
%
|
$
|
393,596
|
100.00
|
%
|
In the
nine month period ended July 31, 2008 we recorded an income tax expense
attributable to discontinued operations and income tax benefit on continuing
operations in accordance with intraperiod tax allocation rules. We made a
significant decrease in our estimated taxable income for discontinued operations
for the fiscal year ended October 31, 2008. As such, we adjusted our
income tax benefit for the three month period ended July 31, 2008 to reflect our
change in estimates.
Loss
from Continuing Operations Discussion:
The
following table summarizes our loss from continuing operations for the nine
months ended July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
Nine
Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase
(decrease)
|
||||||||||||||||||||||
Dollars
|
%
of Net
Revenues
|
Dollars
|
%
of Net
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Loss
from continuing operations
|
$
|
(2,405,192
|
)
|
63.00
|
%
|
$
|
(2,168,703
|
)
|
186.91
|
%
|
$
|
(236,489
|
)
|
9.83
|
%
|
The
increase in loss from continuing operations for the three months ended July 31,
2009 as compared to the same period in fiscal 2008 is a result of overall
economic environment, delay in contract awards, reduction in customer orders and
overall lower revenues. As a result, we determined in the third
quarter of our 2009 fiscal year to discontinue the hardware integration business
and focus solely on our SteelWorks Mobile products based on the Blackberry
Enterprise Server.
Income
(loss) from Discontinued Operations Discussion:
The
following table summarizes our income (loss) from discontinued operations for
the three months ended July 31, 2008 and 2009 in dollars and as a percentage of
net revenues.
Nine Months Ended July 31,
|
||||||||||||||||||||||||
2008
|
2009
|
Increase (decrease)
|
||||||||||||||||||||||
% of Net
|
% of Net
|
|||||||||||||||||||||||
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Percentage
|
|||||||||||||||||||
Income
(loss) from discontinued operations
|
$
|
797,350
|
8.11
|
%
|
$
|
(583,434
|
)
|
5.94
|
%
|
$
|
(1,380,784
|
)
|
(173.17
|
)%
|
30
In Fiscal
2008, we had several significant hardware integration contracts which produced
income. Given the overall downward economic climate, we experienced
contract delays, non-renewals and order constriction in our commercial
business. As a result of the continuing declines in revenues as well
as the cumulative losses, we determined to discontinue our hardware integration
business in the third quarter of our 2009 fiscal year. The net loss
on disposal was approximately $20,000.
31
LIQUIDITY
AND CAPITAL RESOURCES
We have
experienced recurring losses from operations and negative cash
flows. For the nine months ended July 31, 2009, we incurred a net
loss of $2,752,137 and an accumulated deficit of $47,620,701 as of that
date. The report from our independent registered public accounting
firm on our audited financial statements at October 31, 2008 contains an
explanatory paragraph regarding doubt as to our ability to continue as a going
concern as a result of our net loss from operations. Despite our
history of revenues, we can give no assurance that we will be able to maintain
or increase our revenues in fiscal 2009 or that we will be successful in
reaching profitability or generate positive cash flows from our
operations. We are considering all strategic options to improve our
liquidity and provide us with working capital to fund our continuing business
operations including equity offerings, asset sales and debt financing as
alternatives to improve our cash needs; however; we can offer no assurance that
we will be successful in identifying, obtaining or negotiating financing
terms. If adequate funds are not available or are not available on
terms acceptable to us, we will likely not be able to take advantage of
unanticipated opportunities, develop or enhance services or products, respond to
competitive pressures, or continue as a going concern.
Our
consolidated financial statements for the three and nine months ended July 31,
2009 do not give effect to any adjustments to recorded amounts and their
classifications, which would be necessary should we be unable to continue as a
going concern and therefore, be required to realize our assets and discharge our
liabilities in other than the normal course of business and at amounts different
from those reflected in the consolidated financial statements.
As of
July 31, 2009, we had cash and cash equivalents of approximately $366,210 and a
working capital deficit. Management believes our current cash and
cash equivalents are sufficient to maintain our operations for less than 30 days
from December 28, 2009. We do not have any working capital
commitments nor do we presently have any external sources of working capital. We
have recently reduced our cash use rate within a range of $150,000 to $200,000
per month. As such, we conservatively estimate that we will need in
the range of approximately $1,500,000 to $2,000,000 in cash to continue our
operations for the next 12 months. Should our sales volumes increase
any time over the next 12 month period our cash needs could be significantly
reduced. We plan to obtain this capital through various means which
may include any or a combination of equity offerings, assets sales or debt
financing.
On June
15, 2009, we sold an aggregate of 350,000 shares of our common stock, to
our seven directors, for aggregate cash proceeds of $87,500. Each share of
common stock was accompanied by one warrant to purchase one additional share of
common stock, referred to as the “Director Warrants”. The Director
Warrants are exercisable for five years from the October 23, 2009, at an
exercise price of $0.25 per share. The members of the Board of
Directors have indicated that they may choose to provide further bridge
financing at a later date, however, there is no assurance that they will provide
bridge financing when we require it or on terms agreeable to us. If
we are unable to obtain capital through equity offerings, asset sales, debt
financing or additional funding from our Board of Directors, we will be
unable to continue as a going concern.
On
July 1, 2009, we entered into a Business Loan and Security Agreement (referred
to herein as the “Agreement”) with Caledonia Capital Corporation, a
Delaware corporation, referred to as the “Lender” pursuant to which the Lender
agreed to lend to us $250,000 in the form of a Secured Promissory Note, referred
to herein as the “Note”, which was issued on July 1, 2009, referred to as the
“Issuance Date”. The Note
originally provided for a maturity date of December 29, 2009 (the “Maturity
Date”) and an annual interest rate of 15%. The Note was amended on
December 29, 2009 to provide that (a) the annual interest rate of the Note is
20%, (b) accrued interest under the Note shall be payable in monthly
installments commencing February 1, 2010, and continuing on the first business
day of each successive month, and (c) the Maturity Date is March 31,
2010. There are no penalties for early prepayment of the Note.
In the event that any installment of principal and/or interest due under
the Note is not received by the Lender within ten (10) days after the date when
the same is due, then we shall be required to pay a late charge of 5.0% of such
installment. Additionally, in the event that we receive investments
from one or more investors in one or more transactions in an aggregate amount in
excess of $750,000.00, whether in the form of cash, negotiable or non-negotiable
instruments or any form of payment in exchange for the issuance of any
certificated or non-certificated security, whether in the form of debt or
equity, referred to as an “Equity Raise”, at any time between the Issuance Date
and the maturity date, then, we shall be required, within five (5) business days
after the Equity Raise first exceeds $750,000.00, to curtail the accrued
interest and outstanding principal balance of the Note by an amount equal to the
amount by which the Equity Raise then exceeds $750,000.00 (but in no event by
more than the then outstanding principal balance and interest accrued on the
Note). Pursuant to the Agreement and the Note, our obligations thereunder are
secured by a first priority lien in and to all of our intellectual property
rights, title and interest in and to the SteelWorks® Mobile integrated server
appliance software. The Agreement contains standard representations and
warranties for a transaction of this type. As an inducement to the
Lender to make the loan to us, we issued to the Lender a warrant, referred to as
the “Warrant” to purchase up to 625,000 shares of our common stock, $0.001 par
value per share. As an inducement for the Lender to amend the terms
of the Note, we agreed to pay the Lender $25,000. The Warrant is exercisable for
four years at an exercise price of $0.15 per share. The exercise
price may be adjusted in the event of any stock dividend, stock split, stock
combination, reclassification or similar transaction. Additionally, our Board of
Directors has the discretion to reduce the then-current exercise price to any
amount at any time during the term of the Warrant for any period of time the
Board deems appropriate. We have agreed to prepare and file a
registration statement on or about August 31, 2009 for the purposes of
registering the resale of the shares of common stock underlying the
Warrant.
On July
10, 2009, we entered into an Asset Purchase Agreement, referred to as the
“Agreement”, with NCS Technologies, Inc., a Virginia corporation, referred to as
“NCS”, pursuant to which we agreed to sell to NCS, and NCS agreed to purchase
from us, all of our right, title and interest in and to the assets relating to
our computer integration business (comprised of our Federal Systems Integrator
business and the Independent Software Vendors business). The purchase and sale
transaction closed on July 10, 2009, referred to as the “Closing
Date”. The purchase price was $475,000, subject to post-closing
adjustments as set forth in the Agreement. Of this amount, $150,000
was paid as a deposit and the remaining $325,000 is an earn-out amount, which is
payable from and to the extent of revenue NCS receives during the three-year
period after the Closing Date from certain existing and prospective clients, at
a rate equal to 15% of the Net Sales Price (as defined in the Agreement)
received by NCS from such clients. Any payments by NCS to us are due
on or before the 10 th
business day following the month in which NCS receives the payments from the
client(s). Pursuant to the Agreement, NCS also assumed our
liabilities relating to the purchased assets, including fulfillment obligations
under customer purchase orders existing as of the Closing Date, and
responsibilities to clients under the terms of existing warranties and existing
contracts. In addition, we consigned to NCS certain filter inventory
set forth in the Agreement, for a period of two years from the Closing Date.
However, all ownership in and title to the consigned filter inventory and the
intellectual property rights thereto remain vested in us, until any such items
are sold.
On
November 3, 2009, we entered into a Line of Credit and Security Agreement,
referred to herein as the “Credit and Security Agreement”, with the Lender
pursuant to which the Lender agreed to extend to us a revolving line of credit
in the amount of $150,000, in the form of a Revolving Line of Credit Promissory
Note, referred to herein as the “Credit Note”. The Credit Note bears
interest at a rate of 15% per annum, and is payable in monthly installments
commencing 30 days after November 3, 2009, which was the date when we issued the
Credit Note. The principal amount of the Credit Note, together with
interest accrued and unpaid thereon and all other sums due, shall be due and
payable in full upon the earlier to occur of (a) March 31, 2010, or (b) the date
we shall have raised a total of not less than $1,000,000 in capital invested in
our equity which is accompanied by our issuing shares of stock which were not
trading in the public markets prior to the date of the Credit
Note. There are no penalties for early prepayment of the Credit
Note. The Credit Note is a revolving line of credit
note. Principal advances may be made, from time to time, by the
Lender up to the principal amount of the Credit Note, and principal payments may
be made, from time to time by us to reduce the principal balance owing pursuant
to the Credit Note. Our obligations under the Credit and Security
Agreement and the Credit Note are secured by a lien in and to all of our rights,
title and interest in and to its furniture, fixtures, equipment, supplies,
receivables, intangibles, and inventory, together with all present and future
substitutions, replacements and accessories thereto and all present and future
proceeds and products thereof, in any form whatsoever, referred to herein as the
“Collateral”. As an
inducement to the Lender to make the loan, we agreed to issue to the Lender a
warrant, referred to herein as the “Credit Warrant”, to purchase 2.5 shares of
our common stock for every dollar we borrow pursuant to the Credit and Security
Agreement. The Credit Warrant is exercisable for four years at an
exercise price of $0.25 per share. The exercise price may be adjusted
in the event of any stock dividend, stock split, stock combination,
reclassification or similar transaction. On November 4, 2009, we borrowed
$60,000 pursuant to the Credit and Security Agreement and the Credit Note, and
issued to the Lender a Credit Warrant to purchase up to 150,000 shares of our
common stock pursuant to the Credit and Security Agreement. On
November 23, 2009, we borrowed $90,000 pursuant to the Credit and Security
Agreement and the Credit Note, and issued to the Lender a Credit Warrant to
purchase up to 225,000 shares of our common stock pursuant to the Credit and
Security Agreement.
32
For the
nine months ended July 31, 2009, we used $1.1 million in cash from operating
activities. Our primary use of cash was to finance our operating
loss. The use and availability of our cash is affected by the timing,
pricing, and magnitude of orders for our products, and the timing of cash
outflows relating to these orders.
We
generated approximately $498,000 from our investing activities and $322,000 in
financing activities for the nine months ended July 31, 2009.
OFF-BALANCE
SHEET ARRANGEMENTS
Contractual
Obligations and Commercial Commitments
We have
significant contractual obligations for fiscal year 2009 and beyond for our
operating leases and employment agreements.
On
February 27, 2009, we entered into a lease amendment with the landlord of one of
our operation facilities whereby the current lease, which is presently scheduled
to expire on August 31, 2014, has been amended to provide for (i) the extension
of the lease term for a period of one (1) year and four (4) months ending on
December 31, 2015, and (ii) certain other modifications, including a reduction
in our rent cash payments by approximately $60,000 and $34,000 for the fiscal
years 2009 and 2010, respectively. Our monthly straight-line rent
expense will be approximately $21,000 a month for the length of the
lease.
On May
22, 2009, we entered into a Stipulation, pursuant to an Affidavit, stating, as
declared by a general manager of Jones Lang LaSalle, a property management
company and agent for CRP, the landlord of the Premises, that CRP, as landlord,
was seeking a judgment against us for: (i) possession of the Premises, and (ii)
monetary damages for nonpayment of rent due under the Sublease, dated September
28, 2004, by and between us and NEC, and a subsequent assignment of the Sublease
to CRP from NEC, dated December 15, 2008. In the Stipulation we
acknowledged Judgment Amount. Pursuant to the Stipulation, we made
the Forbearance Payment on May 22, 2009 toward the Judgment
Amount. Further we agreed to, and have, vacated the
Premises. CRP agreed to stay enforcement of the Judgment Amount until
the earlier of (a) our receipt of capital in the amount of at least $500,000, or
(b) May 31, 2010. The matter was returned to the court’s files
pending our compliance with the terms of the Stipulation.
On
February 5, 2009, we entered into an Executive Retention Agreement (the “2009
Agreement”) with Brian Hajost, our current President and Chief Executive
Officer, effective as of January 16, 2009. Pursuant to the terms of
the 2009 Agreement, as compensation for Mr. Hajost serving as our President and
Chief Executive Officer, Mr. Hajost receives (a) a semi-monthly salary of
$8,333.33 (or $200,000 annually); (b) a stock grant of 156,000 shares of our
common stock, which will vest ratably over 12 months; and (c) a stock option
grant of 300,000 shares of our common stock, which will vest ratably over a
three year term and have a five year exercise period. The 2009
Agreement further provides that in the event we terminate Mr. Hajost’s
employment without cause (other than due to Mr. Hajost’s request), or if Mr.
Hajost terminates his employment for good reason, Mr. Hajost will be entitled to
(a) if the termination takes place within three months from the date of the 2009
Agreement, two months salary, (b) if the termination takes place between three
and six months from the date of the 2009 Agreement, three months salary, (c) if
the termination takes place between six months and one year from the date of the
2009 Agreement, six months salary, (d) if the termination takes place after the
first year anniversary of the 2009 Agreement, 12 months salary. In
the event that a majority of our stock or a substantial portion of our assets
are acquired, the acquisition closes while Mr. Hajost is employed by us, and Mr.
Hajost’s employment with us is terminated without cause (other than due to Mr.
Hajost’s request) within 30 days of the acquisition, Mr. Hajost will be entitled
to severance pay equal to the lesser of (a) 24 months salary based on his annual
rate of pay for the calendar year before the calendar year of termination from
service, or (b) two times the IRS limit for qualified plans provided for in 26
U.S.C. § 401(a)(17) for the calendar year of termination of
service.
As of
July 31, 2009 the total obligation of our employment agreements for fiscal year
2009 is approximately $197,000 and does not include applicable employment taxes
and potential bonuses.
We do not
have any purchase obligations, capital lease obligations or any material
commitments for capital expenditures. We have not engaged in
off-balance sheet financing, commodity contract trading or significant related
party transactions.
33
From time
to time, we may pursue strategic acquisitions or mergers, which may require
significant additional capital. In such event, we may seek additional financing
of debt and/or equity. We can provide no assurances that any such financings
will be consummated.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of financial statements in conformity with U.S. Generally Accepted
Accounting Principles requires management to make certain judgments, estimates
and assumptions that could affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. We based our estimates and
assumptions on historical experience and on various other assumptions believed
to be applicable, and evaluated them on an on-going basis to ensure they
remained reasonable under current conditions. Actual results could
differ significantly from those estimates.
The
significant accounting policies used in the preparation of our financial
statements are described in Note 3 “Significant Accounting Policies” of the
Footnotes to our Annual Consolidated Financial Statements. Some of
these significant accounting policies are considered to be critical accounting
policies. A critical accounting policy is defined as one that has
both a material impact on our financial condition and results of operations and
requires us to make difficult, complex and/or subjective judgments, often as a
result of the need to make estimates about matters that are inherently
uncertain.
We
believe that the following critical accounting policies reflect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Recently
Issued Accounting Pronouncements
Effective
November 1, 2008, we adopted the provisions of Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) and Statement of
Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS 157, which
defines fair value, establishes a framework for measuring fair value in
accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), and
expands disclosures about fair value measurements. SFAS 157 clarifies
that fair value is an exit price, representing the amount that would be received
to sell asset or paid to transfer a liability in an orderly transaction between
market participants. SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value with changes in fair
value recognized in earnings each period. For the three and six month periods
ended April 30, 2009, we have elected not to use the fair value option permitted
under SFAS 159 for any of our financial assets and financial liabilities that
are not already recorded at fair value.
In
February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB
Statement No. 157” (“FSP 157-2”). FSP 157-2 deferred the effective
date of FAS 157 for all nonfinancial assets and nonfinancial liabilities to
fiscal years beginning after November 15, 2008. We are in the process
of evaluating the effect, if any, the adoption of FSP 157-2 will have on our
financial statements.
In
October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair
Value of a Financial Asset When the Market for that Asset is not Active” (“FSP
157-3”). FSP 157-3 provides guidance for determining the fair value
of a financial asset in an inactive market. We are in the process of
evaluating the effect, if any, the adoption of FSP 157-3 will have on our
financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) “Business Combinations” (“SFAS No. 141R”). SFAS
No. 141R, which replaces SFAS No. 141, requires that the acquisition method of
accounting (which SFAS No. 141 called the “purchase method”) be used for all
business combinations and for an acquirer to be identified for each business
combination. SFAS No. 141R also establishes principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141R also requires that acquisition-related
costs be recognized separately from the business combination. SFAS
No. 141R will apply prospectively to business combinations for which the
acquisition date is after fiscal years beginning on or after December 15,
2008. We are in the process of evaluating the effect, if any, the
adoption of SFAS No. 141R will have on our financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires all
entities to report noncontrolling (minority) interests in subsidiaries as equity
in the consolidated financial statements. Its intention is to
eliminate the diversity in practice regarding the accounting for transactions
between an entity and noncontrolling interests. This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is
prohibited. We are in the process of evaluating the effect, if any,
the adoption of SFAS No. 160 will have on our financial
statements.
34
In May
2008, The FASB issued Statement of Financial Accounting Standards No.162 “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which
reorganizes the GAAP hierarchy. SFAS 162 is intended to improve
financial reporting by providing a consistent framework for determining what
accounting principles should be used in preparing GAAP financial
statements. With the issuance of SFAS 162, the FASB concluded that
the GAAP hierarchy should be directed toward the entity and not its auditor, and
reside in the accounting literature established by the FASB as opposed to the
American Institute of Certified Accountants Statement on Auditing Standards No.
69, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles”. SFAS 162 will become effective 60 days
following the SEC’s approval of the Public Accounting Oversight Board amendments
to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles” and is not expected to have any impact on our
financial statements.
In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165
is effective for interim or annual financial periods ending after June 19,
2009. We are in the process of evaluating the effect, if any, the
adoption of SFAS No. 165 will have on our financial statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB-28-1, “Interim Disclosure about Fair
Value of Financial Instruments” (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments
that are within the scope of FAS 107, “Disclosures about the Fair Value of
Financial Instruments”. Additionally, FSP107-1/APB28-1 requires disclosure of
the methods and significant assumptions used to estimate the fair value of
financial instruments on an interim basis as well as changes of the methods and
significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change
the accounting treatment for these financial instruments and is effective for
interim reporting periods ending after June 15, 2009. We adopted FSP 107-1/APB
28-1 during the quarter ended July 31, 2009 and disclosed the fair value of
our financial instruments in the financial statements.
In April
2009, the FASB issued FSP 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairment” (FSP 115-2/124-2). FSP 115-2/124-2 amends the
requirements for the recognition and measurement of other-than-temporary
impairments for debt securities by modifying the pre-existing “intent and
ability” indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is
triggered when there is an intent to sell the security, it is more likely than
not the security will be required to be sold before recovery, or the security is
not expected to recover the entire amortized cost basis of the
security. Additionally, FSP 115-2/124-2 changes the presentation of
another-than-temporary impairment in the income statement for those impairments
involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other
comprehensive income. FSP 115-5 2/124-2 is effective for interim and annual
reporting periods ending after June 15, 2009. We adopted FSP 115-5 2/124-2 as of
the quarter ended July 31, 2009.
35
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
were no changes in and disagreements with accountants on accounting and
financial issues during our two last fiscal years or any subsequent interim
period.
DIRECTORS
AND EXECUTIVE OFFICERS
The name,
age and position of each of our directors and executive officers are as
follows:
Name
|
Age
|
Position
|
||
Brian
H. Hajost
|
52
|
President
and Chief Executive Officer and Director
|
||
Steven
Snyder
|
50
|
Vice
President of Finance, Principal Financial Officer and
Secretary
|
||
James
Bruno
|
73
|
Director
|
||
VADM
E. A. Burkhalter, Jr. USN
|
80
|
Director
|
||
Jay
Kaplowitz
|
62
|
Director
|
||
Ashok
Kaveeshwar
|
67
|
Director
|
||
Benjamin
Krieger
|
|
72
|
|
Director
|
Brian H.
Hajost has most recently served as our consultant. From February 2007
until June 2008, Mr. Hajost served as Executive Vice President of Cryptek, Inc.
Mr. Hajost served as Chief Operating Officer of the Company from December 2003
until June 2006 and President from June 2005 until June 2006. Prior to December
2003, he served as the Company's Executive Vice President of Sales &
Marketing from June 2001 until his promotion to the Chief Operating Officer
position in 2003. Mr. Hajost also founded two consulting companies in 2006 and
2008.
Steven
Snyder has served as our Vice President of Finance, Principal Financial
Officer and Secretary since November 30, 2009. Since April 2009, Mr.
Snyder has served as the owner of Arinth, LLC, a private consultancy and
third-party software development company. From September 2000 to
February 2009, Mr. Snyder served as the Chief Financial Officer of The Richards
Corporation, a private, family owned supplier of imagery analysis workstations
designed to meet a wide range of aerial surveillance applications used in the
United States and by various governments. During his tenure at The
Richards Corporation, Mr. Snyder also simultaneously served as the Vice
President of Finance and Information Technology, Operations and Materials
Management, where he focused on the generation of profits through the
implementation of improved processed, higher level financial analysis and
customer profitability reporting. Mr. Snyder was also responsible for
a majority of all due diligence work, including financial reporting, budgets and
pro-formas. Mr. Snyder obtained his Bachelor of Science degree
in Accounting from the State University of New York in 1981 and is a Certified
Public Accountant.
James
Bruno has served as our director since September 2000. Mr.
Bruno has served as a member of the Audit Committee of our Board of Directors
since January 2004. Mr. Bruno was formerly President of Syntrex
Corporation, prior to which he served as President of the Computer Division of
Perkin Elmer Corporation. He had formerly served in various
management positions with Electronic Associates, Inc. Mr. Bruno has
extensive experience in the computer industry, as well as corporate
acquisitions. He served as a consultant to SteelCloud, Inc. in 1997
and 1998.
Vice Admiral E.
A. Burkhalter, Jr., USN (Ret.)
has served as
our director since January 1997. In July 2006, Mr. Burkhalter was
appointed Chairman of our Board of Directors. Mr. Burkhalter has
served as a member of each of the Audit Committee, Executive Committee and the
Compensation Committee of our Board of Directors since January
2004. Mr. Burkhalter is currently the President of Burkhalter
Associates, Inc., a consulting firm providing services in the areas of
international and domestic strategy, management policy and technology
applications, for both government and industry. Mr. Burkhalter spent
40 years as a member of the United States Navy, during which time he held
several positions, including Director of Strategic Operations for the Chairman
of the Joint Chiefs of Staff. He is currently a member of the Defense
Intelligence Agency Leadership Council. He is also a trustee of the
US Naval Academy Foundation, and a trustee of the Benedictine
Foundation.
Jay M.
Kaplowitz has served as our director since September 2000. Mr.
Kaplowitz has served as a member of the Compensation Committee of our Board of
Directors since January 2004. Mr. Kaplowitz is a founding partner of
the law firm Gersten Savage LLP, our securities counsel. Mr.
Kaplowitz has more than thirty years experience in corporate, banking and
securities law. He has negotiated and structured numerous financial
and business transactions and has extensive expertise in public and private
equity and debt offerings. Mr. Kaplowitz is a managing member of
Formula Capital, LLC, a private equity fund, and is on the board of Rusoro
Mining Ltd., a company listed on the TSXV (CDNX: RML.V) and of several private
companies. He received a JD from Boston University, and a BA from
Brooklyn College, City University of New York.
36
Benjamin
Krieger has served as our director since September 1999. Mr. Krieger has
served as a member of the Compensation Committee and the Audit Committee of our
Board of Directors since January 2004. Mr. Krieger is currently a partner with
WhiteKnight Solutions, LLC, a business consulting firm that specializes in
acquisitions, divestitures and strategic alliances. Mr. Krieger was formerly a
partner with Corporate Development International, an international company
search firm, where he specialized in the pulp and paper, packaging, graphic arts
and distribution industries. Prior to Corporate Development International, he
was President, CEO and a director of Ris Paper Company. Mr. Krieger began his
career with the Mead Corporation where he was promoted through the Company
during his 25-year tenure.
Ashok Kaveeshwar,
Ph.D. has served as our director since March 2007. Dr. Kaveeshwar has
served as a member of the Executive Committee of our Board of Directors since
2007. Dr. Kaveeshwar has 35 years of technical, management and executive
experience with high technology firms serving both the public and private
sectors. He has also served in the Federal Government as the first administrator
of the Research & Innovative Technology Administration (RITA) at the United
States Department of Transportation, a Presidential appointment requiring Senate
confirmation. Prior to that, he was President of Orange Technologies, Inc, a
company providing government and commercial customers with project life cycle
management software and solutions. Previously, Dr. Kaveeshwar held various
senior executive positions with Raytheon Corporation, Hughes Electronics
Corporation, ST Systems Corporation (STX) and Systems & Applied Sciences
Corporation. Dr. Kaveeshwar has a Ph.D. in Physics from the University at
Buffalo (SUNY), Buffalo, NY.
In fiscal
year 2008, the Board of Directors met seven (7) times (including by
teleconference). All directors attended at least 75% of the
meetings.
Involvement
in Certain Legal Proceedings
No
director, person nominated to become a director, executive officer, promoter or
control person of ours has, during the last five years: (i) been convicted in or
is currently subject to a pending a criminal proceeding (excluding traffic
violations and other minor offenses); (ii) been a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to any
Federal or state securities or banking or commodities laws including, without
limitation, in any way limiting involvement in any business activity, or finding
any violation with respect to such law, nor (iii) any bankruptcy petition been
filed by or against the business of which such person was an executive officer
or a general partner, whether at the time of the bankruptcy or for the two years
prior thereto.
Independence
of Directors
The Board
has determined that Messrs. Bruno, VADM Burkhalter, Kaplowitz, Kaveeshwar and
Krieger, are independent directors as defined in NASDAQ Marketplace Rule
4200.
Committees
of the Board
During
the fiscal year ended October 31, 2008, the Board of Directors held a total of
seven meetings (including teleconference). All incumbent directors attended at
least 75% of the aggregate of all meetings of the Board of Directors and any
committees of the Board on which they served, during the fiscal year ended
October 31, 2008.
The Audit
Committee appoints and provides for the compensation of our independent
auditors; oversees and evaluates the work and performance of the independent
auditors; reviews the scope of the audit; considers comments made by the
independent auditors with respect to accounting procedures and internal controls
and the consideration given thereto by our management; approves all professional
services to be provided to us by our independent auditors; reviews internal
accounting procedures and controls with our financial and accounting staff;
oversees a procedure that provides for the receipt, retention and treatment of
complaints received by us and of confidential and anonymous submissions by
employees regarding questionable accounting or auditing matters; and performs
related duties as set forth in applicable securities laws, NASDAQ corporate
governance guidelines, and the Audit Committee charter (the “Audit
Committee”). The Audit Committee functions pursuant to the Audit
Committee charter adopted by the Board in fiscal 2001. A copy of the
Audit Committee Charter can be found on our web site at www.steelcloud.com
. The Audit Committee met nine (9) times (including by teleconference)
during the fiscal year ended October 31, 2008. The Audit Committee is
currently composed of James Bruno, VADM Burkhalter and Benjamin
Krieger. The Board has determined that all current members of the
Audit Committee are independent directors under the rules of the NASDAQ
Stock Market and each of them is able to read and understand fundamental
financial statements. The Board has determined that James Bruno is
the Company’s Audit Committee “financial expert” as defined in Item 407(d) of
Regulation S-K.
37
The
Compensation Committee has such powers as may be assigned to it by the Board of
Directors from time to time and is currently charged with, among other things,
determining compensation packages for our Chief Executive Officer, President and
Chief Financial Officer, establishing salaries, bonuses and other compensation
for our executive officers and with administering the Company’s Amended 2007
Stock Option and Restricted Stock Plan, the Company’s 2007, 2002 and 1997
Incentive Stock Option Plans, as amended (the "Stock Option Plans"), the 1998
Employee Stock Purchase Plan, as amended (the "1998 Purchase Plan") and
recommending to the Board of Directors changes to such plans (the “Compensation
Committee”). Generally, on its own initiative the Compensation
Committee reviews the performance and compensation of our Chief Executive
Officer and Chief Financial Officer and, following discussions with those
individuals, establishes their compensation levels where it deems appropriate.
For the remaining officers, the Chief Executive Officer makes recommendations to
the Compensation Committee that generally, with such adjustments and
modifications that are deemed necessary or appropriate by the Compensation
Committee, are approved. With respect to equity-based compensation awarded to
others, the Compensation Committee grants stock-based compensation, generally
based upon the recommendation of the Chief Executive Officer. The
Compensation Committee met four (4) times (including by teleconference) during
fiscal 2008. The Compensation Committee is currently composed of VADM
Burkhalter, Jay M. Kaplowitz and Benjamin Krieger. The Board has
determined that all current members of the Compensation Committee are
independent directors under the rules of the NASDAQ Stock Market. The
Compensation Committee does not have a charter.
The
Board of Directors has an Executive Committee (the "Executive Committee"), the
members of which are VADM Burkhalter and Ashok Kaveeshwar. The Executive
Committee has such powers as may be assigned to it by the Board of Directors
from time to time and is currently charged with, among other things,
recommending to the Board of Directors the criteria for candidates to the Board
of Directors, the size of the Board of Directors, the number of committees of
the Board of Directors and their sizes and functions, and the nomination and
selection of Board of Directors' candidates and committee members and rotation
of committee members. In addition, the Executive Committee is
responsible for establishing and implementing an annual evaluation process for
the Chief Executive Officer and the Board of Directors and periodically
assessing the overall composition of the Board of Directors to ensure an
effective membership mix and, when appropriate, recommending to the Board of
Directors a Chief Executive Officer succession plan and succession
process. The Executive Committee met ten (10) times during fiscal
2008. The Executive Committee does not have a
charter.
Code
of Ethics
On
September 9, 2004, the Board adopted a Code
of Ethics that applies to the Chief Executive Officer, Principal Executive
Officers, Senior Financial Officers and Board of Directors. A copy of
the Code of Ethics can be found on our web site at www.steelcloud.com
. The Code of Ethics sets forth our policies and expectations on a
number of topics, including: Integrity of Records and Financial Reporting;
Compliance with Laws, Rules and Regulations; Conflict of Interest; Corporate
Opportunities; Fair Dealing; Confidentiality; Reporting any Illegal or Unethical
Behavior; and Waivers.
The Audit
Committee of the Board of Directors reviews the Code of Ethics annually, and
proposes changes or amendments to the Code of Ethics as
appropriate. Changes or amendments proposed by the Audit Committee
are submitted to the Board of Directors for review.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of December 28, 2009, with
respect to the beneficial ownership of our common stock of more than 5% of the
outstanding shares thereof, by each of our directors and our executives named in
the Summary Compensation Table and by all executive officers and
directors. As of December 28, 2009 we had 15,614,001 shares of
our common stock outstanding. Pursuant to the rules and regulations
of the Securities and Exchange Commission, shares of common stock that an
individual or group has a right to acquire within 60 days pursuant to the
exercise of options or warrants are deemed to be outstanding for the purposes of
computing the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purposes of computing the percentage ownership
of any other person shown in the table.
38
Title of Class
|
Name and Address of Beneficial
Owner
1
|
|
Amount and
Nature
of Beneficial
Ownership
|
|
|
Percentage
of Class
|
||||
Common Stock |
Kevin
M. Murphy 2
|
556,186 | 3.56 | % | ||||||
Common
Stock
|
Brian
H. Hajost 3
|
256,000
|
1.64
|
%
|
||||||
Common
Stock
|
VADM
E.A. Burkhalter 4
|
241,376
|
1.55
|
%
|
||||||
Common
Stock
|
Benjamin
Krieger 5
|
219,576
|
1.41
|
%
|
||||||
Common
Stock
|
James
Bruno 6
|
232,376
|
1.49
|
%
|
||||||
Common
Stock
|
Jay
M. Kaplowitz 7
|
220,506
|
1.41
|
%
|
||||||
Common
Stock
|
Ashok
Kaveeshwar 8
|
175,000
|
1.12
|
%
|
||||||
All
Executive Officers and Directors as a Group (7
persons)(2)-(7)
|
1,901,020
|
12.18
|
%
|
1
|
The address of each of such
individuals is c/o SteelCloud, Inc., 13962 Park Center Road, Herndon
Virginia 20171.
|
2
|
Includes
370,000 shares of our common stock underlying stock options granted
pursuant to the 1997 and 2002 Stock Option Plans which expire on
December 30, 2009. Also includes 67,500 of vested Restricted Stock, issued
to Mr. Murphy pursuant to his employment agreement and 50,000 shares of
our common stock underlying warrants. The restricted shares of stock were
issued pursuant to our Amended 2007 Stock Option and Restricted Stock
Plan. Mr. Murphy resigned from his position with our company effective
November 30, 2009.
|
3
|
Includes 156,000 of Restricted
Stock, issued to Mr. Hajost pursuant to his employment agreement and
50,000 shares of our common stock underlying warrants. The
shares of Restricted Stock vest ratably over a period of one year from the
anniversary date of the grant, January 14, 2009. These
restricted shares of stock were issued pursuant to our Amended 2007 Stock
Option and Restricted Stock
Plan.
|
4
|
Includes 100,000 shares of our
common stock underlying stock options granted pursuant to the 1997 and
2002 Stock Option Plans, of which all are currently exercisable, 50,000
shares of our common stock underlying warrants and 6,000 shares owned by
Mr. Burkhalter’s spouse of which he disclaims beneficial
ownership.
|
5
|
Includes 75,000 shares of our
common stock underlying stock options granted pursuant to the 1997 and
2002 Stock Option Plans, of which all are currently exercisable and 50,000
shares of our common stock underlying
warrants.
|
6
|
Includes 90,000 shares of our
common stock underlying stock options granted pursuant to the 1997 and
2002 Stock Option Plans, of which all are currently exercisable and 50,000
shares of our common stock underlying
warrants.
|
7
|
Includes 85,000 shares of our
common stock underlying stock options granted pursuant to the 1997 and
2002 Stock Option Plans, of which all are currently exercisable and 50,000
shares of our common stock underlying
warrants.
|
8
|
Includes 65,000 shares of our
common stock underlying stock options granted pursuant to the 2002 Stock
Option Plan, of which all are currently exercisable and 50,000 shares of
our common stock underlying
warrants.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We have
paid approximately $83,000, $93,000 and $81,000 during fiscal year 2007, 2008,
and for the nine months ended July 31, 2009, respectively, to Gersten Savage LLP
in connection with legal services. Jay M. Kaplowitz, a member of our
Board of Directors, and a member of the Compensation Committee, is a partner at
Gersten Savage LLP.
Our
executive officers and directors may be considered our promoters due to
their participation in and management of the business since our
incorporation.
As the
Company previously disclosed in a Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 8, 2009, on July 1, 2009 the Company
entered into a Business Loan and Security Agreement with Caledonia Capital
Corporation, a Delaware corporation, (the “Lender”) pursuant to which the Lender
agreed to lend to the Company $250,000 in the form of a Secured Promissory Note
(the “Loan”). The Loan bears interest at a rate of 15% per annum,
and is payable in quarterly installments commencing three months after July 1,
2009, or October 1, 2009. Mr. Steven Snyder, the Company’s Principal
Financial Officer, was a member of a group of individuals who invested money
with the Lender for purposes of making the Loan to the Company. Mr.
Snyder’s investment in the Loan was $25,000. At the time of Mr.
Snyder’s investment, he was an unrelated party to the
Company. The current amount outstanding on the Loan is
$250,000. To date, the Company has made $9,375 interest payments on
the Loan and $0 principal payments on the Loan.
39
Director
Independence
This
information is provided under the heading “Directors and Executive
Officers-Independence of Directors.”
EXECUTIVE
COMPENSATION
The
following table sets forth certain information regarding compensation paid by us
during each of the last two fiscal years to our Chief Executive Officer and to
each of our executive officers who were paid in excess of $100,000 (the “Named
Officers”).
Summary
Compensation Table
Stock
|
Option
|
|||||||||||||||||||||||||
Salary
|
Bonus
|
Awards
|
Awards
|
Other
|
Total
|
|||||||||||||||||||||
Name and Principal
Position
|
Year
|
($)
|
($)
|
($) 1
|
($)
|
($) 2
|
($)
|
|||||||||||||||||||
Robert E. Frick 3
|
2008
|
267,000
|
-0-
|
-0-
|
50,624
|
21,731
|
339,355
|
|||||||||||||||||||
President
and Chief Executive Officer
|
2007
|
48,333
|
4
|
40,000
|
5,000
|
2,325
|
5,235
|
100,893
|
||||||||||||||||||
Kevin
M. Murphy 5
|
2008
|
220,000
|
-0-
|
-0-
|
76,274
|
25,988
|
322,262
|
|||||||||||||||||||
Chief
Financial Officer and
|
2007
|
185,000
|
50,000
|
-0-
|
29,432
|
43,818
|
308,250
|
|||||||||||||||||||
Executive
Vice President
|
||||||||||||||||||||||||||
Clifton W. Sink 6
|
2007
|
238,000
|
-0-
|
-0-
|
131,694
|
7
|
274,034
|
8
|
643,728
|
|||||||||||||||||
Former
President and Chief
|
||||||||||||||||||||||||||
Executive
Officer
|
||||||||||||||||||||||||||
Robert
Richmond
|
2007
|
154,471
|
9
|
-0-
|
-0-
|
-0-
|
21,096
|
175,567
|
||||||||||||||||||
Former
Chief Operating Officer
|
1
|
In fiscal year 2008, none of the
named executive officers forfeited options. In fiscal year 2007
Mr. Sink forfeited 170,000 options and Mr. Richmond forfeited 100,000
options. For additional information pertaining to assumptions
made in determining the value of the stock awards, please see note 10,
“Stock Based Compensation” of our financial statements, in our Annual
Report on Form 10-K for the fiscal year ended October 31, 2008, filed with
the commission on January 29,
2009.
|
2
|
Other compensation includes
commissions, accumulated leave payouts, fixed expense allowances, 401K
match expense and health and dental insurance provided by
us.
|
3
|
Mr. Frick joined us in August
2007 as Executive Director and was appointed to our Board of
Directors. In October 2007, Mr. Frick was named our President
and Chief Executive Officer. Mr. Frick’s employment with the
Company ended on January 9,
2009.
|
4
|
This amount represents Mr.
Frick’s pro-rated salary based on an annual salary of $260,000 for fiscal
year 2007 per his employment agreement, including approximately $27,000 of
compensation attributable to his tenure as Executive
Director.
|
5 | Mr. Murphy resigned from his position with our company effective November 30, 2009. |
6
|
In August 2007, we entered
into an employment resignation agreement with Mr. Sink pursuant to which
Mr. Sink resigned his positions as our President and Chief Executive
Officer and Board Member effective November 1,
2007.
|
7
|
We modified the vesting
conditions of Mr. Sink’s stock options issued in November
2006. The vesting date of the first tranche of options was
accelerated from November 24, 2007 to October 31,
2007. Mr. Sink forfeited the 170,000 remaining options
pertaining to the November 2006 grant on the modification
date.
|
8
|
This amount includes a
one-time severance payment of $237,000 per M r. Sink’s employment
resignation agreement.
|
9
|
This amount represents Mr.
Richmond’s pro-rated salary based on an annual salary of $175,000 for
fiscal years 2007 per his employment agreement. Mr. Richmond’s employment
with us ended on September 18,
2007.
|
40
Outstanding
Equity Awards at October 31, 2008
OPTION AWARDS
|
STOCK AWARDS
|
|||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Option
Exercise
Price ($)
|
Number of
Shares or
Units of
Stock
That Have
Not Vested
(#)
|
Market
Value of
Shares or
Units
of Stock
That
Have Not
Vested
($) 1
|
|||||||||||||||
Robert
E. Frick
|
33,334 | 66,666 2 | 1.20 | |||||||||||||||||
- | 125,000 3 | 1.35 | 66,333 | 39,137 | ||||||||||||||||
Kevin
M. Murphy
|
100,000 | - | 2.31 | |||||||||||||||||
75,000 | - | 2.40 | ||||||||||||||||||
110,000 | 60,000 4 | 0.62 | ||||||||||||||||||
50,000 | 50,000 5 | 1.25 | ||||||||||||||||||
- | 125,000 3 | 1.35 |
|
1
|
Based on the closing price of our
common stock of $0.59 per share on October 31,
2008.
|
|
2
|
33,333 options vest on September
11, 2009 and 33,333 options vest on September 11,
2010.
|
|
3
|
All unexercisable options
pertaining to this grant vested on June 3, 2009. Mr. Murphy resigned
from his position with our company effective November
30,2009.
|
|
4
|
All unexercisable options
pertaining to this grant vested on November 24,
2008.
|
|
5
|
All unexercisable options
pertaining to this grant vested on October 25,
2009.
|
Employment
Agreements; Termination of Employment
On
January 12, 2009 (the “Agreement Date”), we entered into an Amendment to
Employment Agreement (the “Amended Agreement”) with Robert E. Frick, our then
Chief Executive Officer and President, pursuant to which the terms of Mr.
Frick’s employment agreement, dated August 27, 2007, were amended. Under the
terms of the Amended Agreement, the parties agreed that Mr. Frick’s employment
with us terminated effective January 9, 2009 as a result of Mr. Frick’s
health. Further, pursuant to the Amended Agreement, Mr. Frick
resigned from our Board of Directors. Mr. Frick will receive paid
family health and dental insurance under our standard policies for six months
from the Agreement Date and $10,231 as compensation for Mr. Frick’s retained
leave balance of 10 days. Additionally, Mr. Frick served as a
consultant for us for six months from the Agreement Date for compensation of
$11,250 per month.
On
February 5, 2009, we entered into an Executive Retention Agreement (the “2009
Agreement”) with Brian Hajost, our President and Chief Executive Officer,
effective as of January 16, 2009. Pursuant to the terms of the 2009
Agreement, as compensation for Mr. Hajost serving as our President and Chief
Executive Officer, Mr. Hajost receives (a) a semi-monthly salary of $8,333.33
(or $200,000 annually); (b) a stock grant of 156,000 shares of our common stock,
which will vest ratably over 12 months; and (c) a stock option grant of 300,000
shares of our common stock, which will vest ratably over a three year term and
have a five year exercise period. The 2009 Agreement further provides
that in the event that we terminate Mr. Hajost’s employment without cause (other
than due to Mr. Hajost’s request), or if Mr. Hajost terminates his employment
for good reason, Mr. Hajost will be entitled to (a) if the termination takes
place within three months from the date of the 2009 Agreement, two months
salary, (b) if the termination takes place between three and six months from the
date of the 2009 Agreement, three months salary, (c) if the termination takes
place between six months and one year from the date of the 2009 Agreement, six
months salary, (d) if the termination takes place after the first year
anniversary of the 2009 Agreement, 12 months salary. In the event
that a majority of our common stock or a substantial portion of our assets are
acquired, the acquisition closes while Mr. Hajost is employed by us, and Mr.
Hajost’s employment with us is terminated without cause (other than due to Mr.
Hajost’s request) within 30 days of the acquisition, Mr. Hajost will be entitled
to severance pay equal to the lesser of (a) 24 months salary based on Hajost’s
annual rate of pay for the calendar year before the calendar year of termination
from service, or (b) two times the IRS limit for qualified plans provided for in
26 U.S.C. § 401(a)(17) for the calendar year of termination of
service.
41
Compensation
of Directors
We do not
compensate directors who also serve as our executive officers for their services
on the Board. During fiscal 2008, we compensated all of our non-employed
directors for participation at meetings of the Board and Committees of the Board
by granting each of our outside directors stock options to purchase 40,000
shares of our common stock at an exercise price of $1.35 per share in June
2008. All of the options granted to the outside directors were
pursuant to our 1997 and 2002 Stock Option Plans, as amended. The
following table reflects all compensation awarded to, earned by or paid to our
directors for the fiscal year ended October 31, 2008.
Name
|
Fees
earned or
paid in
cash
($)
|
Option
Awards
($)
|
All other
compensation
($) 1
|
Total
($)
|
||||||||||||
James
Bruno
|
6,000 | 10,386 2 | 3,118 | 19,504 | ||||||||||||
Al
Burkhalter
|
6,000 | 10,386 3 | 1,879 | 18,265 | ||||||||||||
Jay
M. Kaplowitz
|
3,000 | 10,386 4 | 376 | 13,372 | ||||||||||||
Ashok
Kaveeshwar
|
3,000 | 10,386 5 | 539 | 13,925 | ||||||||||||
Ben
Krieger
|
6,000 | 10,386 6 | 3,502 | 19,888 |
|
1
|
Consists solely of travel
expenses paid by us for travel to Board of Director
Meetings.
|
|
2
|
100,000 option awards outstanding
on October 31, 2008.
|
|
3
|
110,000 option awards outstanding
on October 31, 2008.
|
|
4
|
95,000 option awards outstanding
on October 31, 2008.
|
|
5
|
65,000 option awards outstanding
on October 31, 2008.
|
|
6
|
85,000 option awards outstanding
on October 31, 2008.
|
Members
of our Board of Directors receive $1,000 for each Board of Directors meeting
attended. In addition, each member of the Audit Committee receives
$500 for each Audit Committee meeting attended. Audit Committee
members shall be entitled to receive a total of $1,500 in their capacity as both
a director and Audit Committee member.
42
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended (the “Act”) may be permitted for our directors, officers and
controlling persons we have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
43
No
dealer, salesperson or any other person is authorized to give any information or
make any representations in connection with this offering other than those
contained in this prospectus and, if given or made, the information or
representations must not be relied upon as having been authorized by us. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this prospectus, or an
offer to sell or a solicitation of an offer to buy any securities by anyone in
any jurisdiction in which the offer or solicitation is not authorized or is
unlawful.
Up
to 16,000,000 Shares of Common Stock together with 16,000,000
Warrants
And
Up
to 800,000 Shares of Common Stock Underlying Placement Agent
Warrants.
PROSPECTUS
___,
2009
44
PART
II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13.
|
Other
Expenses of Issuance and
Distribution.
|
The
following table sets forth the expenses payable by us in connection with this
offering (not including the Placement Agent Fee) of securities described in this
registration statement. All amounts shown are estimates, except for the SEC
registration fee. We will bear all expenses shown below and the Placement Agent
Fee.
SEC
filing fee
|
$
|
578
|
||
Accounting
fees and expenses
|
$
|
15,000
|
||
Legal
fees and expenses
|
$
|
40,000
|
||
Printing
and engraving expenses
|
$
|
1,422
|
||
Other
|
$
|
-
|
||
Total
|
$
|
57,000
|
Item 14.
|
Indemnification of Directors and
Officers.
|
Our
By-Laws, as amended to date, provide for indemnification of officers and
directors to the fullest extent permitted by the Virginia Stock Corporation Act,
provided such officer or director acts in good faith and in a manner which such
person reasonably believes to be in or not opposed to the best interests of the
registrant, and with respect to any criminal matter, had no reasonable cause to
believe such person’s conduct was unlawful.
Virginia
Stock Corporation Act
Section 697
A of the Virginia Stock Corporation Act (“VSCA”) provides that a corporation may
indemnify an individual made a party to a proceeding because he is or was a
director against liability incurred in the proceeding if (1) he conducted
himself in good faith, (2) he believed, in the case of conduct in his
official capacity with the corporation, that his conduct was in its best
interests, and, in all other cases, that his conduct was at least not opposed to
its best interests, and (3) in the case of any criminal proceeding, he had
no reasonable cause to believe his conduct was unlawful. Section 697 C of
the VSCA provides that the termination of a proceeding by judgment, order,
settlement or conviction is not, of itself, determinative that the director did
not meet the standard of conduct set forth in Section 697 A.
Section 697
D of the VSCA provides that a corporation may not indemnify a director under
Section 697 in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation, or in
connection with any other proceeding charging improper personal benefit to him,
whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Indemnification permitted under Section 697 of the VSCA in connection
with a proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 698
of the VSCA states that, unless limited by its articles of incorporation, a
corporation shall indemnify a director who entirely prevails in the defense of
any proceeding to which he was a party because he is or was a director of the
corporation against reasonable expenses incurred by him in connection with the
proceeding.
Section 701
of the VSCA provides that a corporation may not indemnify a director under
Section 697 unless authorized in the specific case after a determination
has been made that indemnification of the director is permissible in the
circumstances because he has met the standard of conduct set forth in
Section 697. Such determination is to be made (1) by the board of
directors by a majority vote of a quorum consisting of directors not at the time
parties to the proceeding, (2) if such a quorum is not obtainable, by
majority vote of a committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting solely of two
or more directors not at the time parties to the proceeding, (3) by special
legal counsel selected as set forth in the statute, or (4) by the
shareholders (without the vote of shares owned by or voted under the control of
directors who are at the time parties to the proceeding).
Section 699
of the VSCA provides that a corporation may pay for or reimburse the reasonable
expenses incurred by a director who is a party to a proceeding in advance of the
final disposition of the proceeding if (1) the director furnishes the
corporation a written statement of his good faith belief that he has met the
standard of conduct described in Section 697, (2) the director
furnishes the corporation a written undertaking to repay the advance if it is
ultimately determined that he did not meet the standard of conduct, and
(3) a determination is made that the facts then known to those making the
determination would not preclude indemnification. Determinations and
authorizations of payments under Section 699 are to be made in the manner
specified in Section 701 of the VSCA.
II-1
Under
Section 700.1 of the VSCA, an individual who is made a party to a
proceeding because he is or was a director of a corporation may apply to a court
for an order directing the corporation to make advances or reimbursement for
expenses or to provide indemnification. The court shall order the corporation to
make advances and/or reimbursement for expenses or to provide indemnification if
it determines that the director is entitled to such advances, reimbursement or
indemnification and shall also order the corporation to pay the director’s
reasonable expenses incurred to obtain the order. With respect to a proceeding
by or in the right of the corporation, the court may (1) order
indemnification of the director to the extent of his reasonable expenses if it
determines that, considering all the relevant circumstances, the director is
entitled to indemnification even though he was adjudged liable to the
corporation and (2) also order the corporation to pay the director’s
reasonable expenses incurred to obtain the order of
indemnification.
Section 702
of VSCA states that, unless limited by a corporation’s articles of
incorporation, (1) an officer of the corporation is entitled to mandatory
indemnification under Section 698 of the VSCA, and is entitled to apply for
court-ordered indemnification under Section 700 of the VSCA, to the same
extent as a director, and (2) the corporation may indemnify and advance
expenses to an officer, employee or agent of the corporation to the same extent
as to a director.
Section 703
of the VSCA provides that a corporation may purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee or agent of
the corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against liability asserted against him or incurred by him in that
capacity, or arising from his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Sections 697 or 698 of the VSCA.
Section 704
of the VSCA states that a corporation shall have power to make any further
indemnity, including indemnity with respect to a proceeding by or in the right
of the corporation, and to make additional provision for advances and
reimbursement of expenses, to any director, officer, employee or agent that may
be authorized by its articles of incorporation or any bylaw made by the
shareholders or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against (1) his willful misconduct, or
(2) a knowing violation of the criminal law. Unless the articles of
incorporation, or any such bylaw or resolution expressly provide otherwise, any
determination as to the right to any further indemnity shall be made in
accordance with Section 701 B of the VSCA. Each such indemnity may continue as
to a person who has ceased to have the capacity referred to above and may inure
to the benefit of the heirs, executors and administrators of such
person.
Article 11
of our Articles of Incorporation provides that we shall, to the fullest extent
permitted by the law of Virginia, indemnify an individual who is or was our
director or officer and who was, is, or is threatened to be made, a named
defendant or respondent in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal (collectively, a “proceeding”), against any obligation to pay
a judgment, settlement, penalty, fine (including any excise tax assessed with
respect to any employee benefit plan) or other liability and reasonable expenses
(including counsel fees) incurred with respect to such a proceeding, except such
liabilities and expenses as are incurred because of such director’s or officer’s
willful misconduct or knowing violation of criminal law.
Article 11
also provides that unless a determination has been made that indemnification is
not permissible, we shall make advances and reimbursements for expenses
reasonably incurred by a director or officer in a proceeding as described above
upon receipt of an undertaking from such director or officer to repay the same
if it is ultimately determined that such director or officer is not entitled to
indemnification.
Article 11
also provides that the determination that indemnification is permissible, the
authorization of such indemnification (if applicable), and the evaluation as to
the reasonableness of expenses in a specific case shall be made as provided by
law. Special legal counsel selected to make determinations under such
Article 11 may be counsel for us. The termination of a proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not of itself create a presumption that a director or
officer acted in such a manner as to make him or her ineligible for
indemnification. For the purposes of Article 11, every reference to a
director or officer includes, without limitation, (1) every individual who
is our director or officer, (2) an individual who, while a director or
officer, is or was serving at our request as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
(3) an individual who formerly was our director or officer or who, while a
director or officer, occupied at our request any of the other positions referred
to in clause (2) of this sentence, and (4) the estate, personal
representative, heirs, executors and administrators of our director or officer
or other person referred to herein. Service as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
controlled by us is deemed service at our request. A director or officer is
deemed to be serving an employee benefit plan at our request if such person’s
duties to us also impose duties on, or otherwise involve services by, such
person to the plan or to participants in or beneficiaries of the
plan.
II-2
Indemnification
Agreements
We may
enter into indemnification agreements with our directors and officers for the
indemnification of and advancing of expenses to such persons to the fullest
extent permitted by law.
In
addition, we maintain directors’ and officers’ liability insurance which insures
against liabilities that our directors and officers may incur in such
capacities.
Reference
is made to “Undertakings,” below, for the registrant’s undertakings in this
registration statement with respect to indemnification of liabilities arising
under the Securities Act of 1933, as amended.
Item 15.
|
Recent Sales of Unregistered
Securities.
|
On June
19, 2009, we sold an aggregate of 350,000 shares of our common stock, $.001 par
value per share, to our seven directors, for aggregate cash proceeds of
$87,500. The shares of common stock were sold at $0.25 per
share. Each share of common stock was accompanied by one Director
Warrant to purchase one additional share of common stock. The
Director Warrants are exercisable for five years from the date that our
shareholders approved the issuance of the Director Warrants, at an exercise
price of $0.25 per share.
On
July 1, 2009, we entered into a Business Loan and Security Agreement, referred
to as the “Agreement”, with Caledonia Capital Corporation, a Delaware
corporation, referred to as the “Lender”, pursuant to which the Lender agreed to
lend to us $250,000 in the form of a Secured Promissory Note, referred to as the
“Note”, which was issued on July 1, 2009, referred to as the “Issuance
Date”. The Note
originally provided for a maturity date of December 29, 2009 (the “Maturity
Date”) and an annual interest rate of 15%. The Note was amended on
December 29, 2009 to provide that (a) the annual interest rate of the Note is
20%, (b) accrued interest under the Note shall be payable in monthly
installments commencing February 1, 2010, and continuing on the first business
day of each successive month, and (c) the Maturity Date is March 31,
2010. There are no penalties for early prepayment of the Note.
In the event that any installment of principal and/or interest due under
the Note is not received by the Lender within ten (10) days after the date when
the same is due, then we shall be required to pay a late charge of 5.0% of such
installment. Additionally, in the event that we receive investments
from one or more investors in one or more transactions in an aggregate amount in
excess of $750,000.00, whether in the form of cash, negotiable or non-negotiable
instruments or any form of payment in exchange for the issuance of any
certificated or non-certificated security, whether in the form of debt or
equity, referred to as an “Equity Raise”, at any time between the Issuance Date
and the maturity date, then, we shall be required, within five (5) business days
after the Equity Raise first exceeds $750,000.00, to curtail the accrued
interest and outstanding principal balance of the Note by an amount equal to the
amount by which the Equity Raise then exceeds $750,000.00 (but in no event by
more than the then outstanding principal balance and interest accrued on the
Note). Pursuant to the Agreement and the Note, our obligations thereunder are
secured by a first priority lien in and to all of our intellectual property
rights, title and interest in and to the SteelWorks® Mobile integrated server
appliance software. The Agreement contains standard representations
and warranties for a transaction of this type. As an inducement to
the Lender to make the loan to us, we issued to the Lender a warrant, referred
to as the “Warrant”, to purchase up to 625,000 shares of our common stock,
$0.001 par value per share. As an inducement for the Lender to amend
the terms of the Note, we agreed to pay the Lender $25,000. The Warrant is
exercisable for four years at an exercise price of $0.15 per
share. The exercise price may be adjusted in the event of any stock
dividend, stock split, stock combination, reclassification or similar
transaction. Additionally, our Board of Directors has the discretion to reduce
the then-current exercise price to any amount at any time during the term of the
Warrant for any period of time the Board deems appropriate. We have
agreed to prepare and file a registration statement on or about August 31, 2009
for the purposes of registering the resale of the shares of common stock
underlying the Warrant. The terms of the transaction were the result
of arm’s length negotiations between us and the Lender. Prior to the
completion of the transaction, neither we nor any of our affiliates or officers,
directors or their associates had any material relationship with the Lender,
other than in respect of the applicable material definitive agreements and the
transactions contemplated therein and related thereto.
On August
24, 2009, we converted $6,000 of outstanding fees owed to our investor relations
firm, Rubenstein Investor Relations into warrants to purchase 115,000 of our
common stock, at $0.20 per share. The warrant is exercisable for five
years from August 24, 2009.
On
October 23, 2009, we converted $35,000 of outstanding legal fees into shares of
our common stock, at $0.32 per share, the closing price of our common stock on
October 23, 2009. As a result of the conversion, we issued 109,375
shares of our common stock to Gersten Savage LLP, our legal
counsel.
II-3
On
November 3, 2009, we entered into a Line of Credit and Security Agreement,
referred to herein as the “Credit and Security Agreement”, with the Lender
pursuant to which the Lender agreed to extend to us a revolving line of credit
in the amount of $150,000, in the form of a Revolving Line of Credit Promissory
Note, referred to herein as the “Credit Note”. The Credit Note bears
interest at a rate of 15% per annum, and is payable in monthly installments
commencing 30 days after November 3, 2009, which was the date when we issued the
Credit Note. The principal amount of the Credit Note, together with
interest accrued and unpaid thereon and all other sums due, shall be due and
payable in full upon the earlier to occur of (a) March 31, 2010, or (b) the date
we shall have raised a total of not less than $1,000,000 in capital invested in
our equity which is accompanied by our issuing shares of stock which were not
trading in the public markets prior to the date of the Credit
Note. There are no penalties for early prepayment of the Credit
Note. The Credit Note is a revolving line of credit
note. Principal advances may be made, from time to time, by the
Lender up to the principal amount of the Credit Note, and principal payments may
be made, from time to time by us to reduce the principal balance owing pursuant
to the Credit Note. Our obligations under the Credit and Security
Agreement and the Credit Note are secured by a lien in and to all of our rights,
title and interest in and to its furniture, fixtures, equipment, supplies,
receivables, intangibles, and inventory, together with all present and future
substitutions, replacements and accessories thereto and all present and future
proceeds and products thereof, in any form whatsoever, referred to herein as the
“Collateral”. As an
inducement to the Lender to make the loan, we agreed to issue to the Lender a
warrant, referred to herein as the “Credit Warrant”, to purchase 2.5 shares of
our common stock for every dollar we borrow pursuant to the Credit and Security
Agreement. The Credit Warrant is exercisable for four years at an
exercise price of $0.25 per share. The exercise price may be adjusted
in the event of any stock dividend, stock split, stock combination,
reclassification or similar transaction. On November 4, 2009, we borrowed
$60,000 pursuant to the Credit and Security Agreement and the Credit Note, and
issued to the Lender a Credit Warrant to purchase up to 150,000 shares of our
common stock. On November 23, 2009, we borrowed $90,000 pursuant to
the Credit and Security Agreement and the Credit Note, and issued to the Lender
a Credit Warrant to purchase up to 225,000 shares of our common
stock. The terms of the transaction were the result of arm’s length
negotiations between us and the Lender. Prior to the completion of
the transaction, neither we nor any of our affiliates or officers, directors or
their associates had any material relationship with the Lender, other than in
respect of the applicable material definitive agreements and the transactions
contemplated therein and related thereto.
We relied
on the exemption from the registration provisions of the Securities Act of 1933,
as amended, contained in Section 4(2) thereof for each of the transactions
described above.
Item 16.
|
Exhibits.
|
The
following exhibits are filed herewith or incorporated by reference
herein:
Exhibit
Number
|
Description
|
|
3.1
|
Articles
of Incorporation of the Company, dated February 25, 1998, and effective as
of February 26, 1998. (Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Amendment No. 1, dated April
23, 1998 (File No. 333-47631) and hereby incorporated by
reference).
|
|
3.2
|
By-laws
of the Company, effective as of March 5, 1998. (Filed as
Exhibit 3.2 to the Company's Registration Statement on Form S-1, Amendment
No. 2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference).
|
|
4.1
|
Specimen
common stock certificate for the Company. (Filed as Exhibit 4.1
to the Company's S-8 dated July 15, 2002 (File No. 333-47631) and
hereby incorporated by reference).
|
|
4.2
|
Form
of Warrant. (Filed as Exhibit 4.2 to Amendment No. 1 to the Company’s
Registration Statement dated June 25, 2009 (Registration No. 333-158703)
and hereby incorporated by reference).
|
|
4.3
|
Form
of Placement Agent Warrant. (Filed as Exhibit 4.3 to Amendment
No. 5 to the Company’s Registration Statement dated October 23, 2009
(Registration No. 333-158703) and hereby incorporated by
reference).
|
|
4.3.1
|
Amended
Form of Placement Agent Warrant. (Filed as Exhibit 4.3.1 to
Amendment No. 6 to the Company’s Registration Statement dated October 29,
2009 (Registration No. 333-158703) and hereby incorporated by
reference).
|
|
*4.3.2
|
Amendment
No. 2 to Form of Placement Agent Warrant.
|
|
*5.1
|
Legal
Opinion of Gersten Savage LLP.
|
|
10.1
|
Employment
Agreement by and between Dunn and Thomas P. Dunne (Filed as Exhibit 99.2
to Dunn's Registration Statement on Form SB-2, Amendment 2, dated April 4,
1997 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.2
|
1997
Amended Stock Option Plan. (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1, Amendment No. 2, dated April
23, 1998 (File No. 333-92406) and hereby incorporated by
reference).
|
|
10.3
|
Agreement,
dated May 5, 1997, by and between International Data Products, Corp. and
the U.S. Air Force, the Desktop V Contract. (Filed as Exhibit
10.13 to the Company's Registration Statement on Form S-1, Amendment
No. 2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference).
|
|
10.4
|
Employee
Stock Purchase Plan. (Filed as Exhibit 10.22 to the Company’s 10-K, dated
February 16, 1999 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.5
|
Employment
Agreement by and between SteelCloud, Inc. and Kevin Murphy, dated June 8,
2004. (Filed as Exhibit 10.32 to the Company’s 10-K, dated January 26,
2005 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.6
|
Employment
Agreement by and between SteelCloud, Inc. and Brian Hajost, dated June 8,
2004. (Filed as Exhibit 10.33 to the Company’s 10-K, dated January 26,
2005 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.7
|
Sublease
by and between SteelCloud and NEC America Inc., dated September 28, 2004.
(Filed as Exhibit 10.35 to the Company’s 10-K, dated January 26, 2005 and
hereby incorporated by reference).
|
|
10.8
|
Revised
Rent Commencement Date Agreement, dated March 16, 2005 between OTR and the
Company (Filed as Exhibit 10.36 to the Company’s 10-K, dated January 30,
2006 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.9
|
Standard
Industrial Gross Lease, dated November 4, 2004 between OTR and the Company
and Lease Amendment #1, dated March 28, 2005 (Filed as Exhibit 10.37 to
the Company’s 10-K, dated January 30, 2006 (File No. 000-24015) and hereby
incorporated by reference).
|
|
10.10
|
Loan
Agreement, dated January 22, 2004, by and between SteelCloud, Inc. and
Wachovia Bank, National Association and Promissory Note
issued by SteelCloud, Inc. on March 21, 2005 to Wachovia Bank, National
Association (Filed as Exhibit 10.36 to the Company’s 10-K, dated January
30, 2006 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.11
|
Employment
Agreement by and between SteelCloud, Inc. and Clifton W. Sink (Filed as
Exhibit 10.1 to the Company’s 8-K, dated June 8, 2006 (File No. 000-24015)
and hereby incorporated by reference).
|
|
10.12
|
Separation
Agreement by and between SteelCloud, Inc. and Thomas P. Dunne (Filed as
Exhibit 10.1 to the Company’s 8-K, dated June 19, 2006 (File No.
000-24015) and hereby incorporated by reference).
|
|
10.13
|
Employment
Agreement by and between SteelCloud, Inc. and Robert Richmond (Filed as
Exhibit 10.1 to the Company’s 8-K, dated September 21, 2006 (File No.
000-24015) and hereby incorporated by
reference).
|
II-4
10.14
|
Amendment,
dated April 19, 2006, to Employment Agreement by and between SteelCloud,
Inc. and Brian Hajost, dated June 8, 2004, originally filed as Exhibit
10.33 to the Company’s 10-K, dated January 26, 2005 (Filed as Exhibit
10.42 to the Company’s 10-K, dated January 23, 2007 (File No. 000-24015)
and hereby incorporated by reference).
|
|
10.15
|
Employment
Agreement as Executive Director by and between SteelCloud, Inc. and Robert
E. Frick (Filed as Exhibit 10.1 to the Company’s 8-K, dated August 31,
2007 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.16
|
Employment
Agreement as President and Chief Executive Officer by and between
SteelCloud, Inc. and Robert E. Frick (Filed as Exhibit 10.2 to the
Company’s 8-K, dated August 31, 2007 (File No. 000-24015) and hereby
incorporated by reference).
|
|
10.17
|
Employment
Resignation Agreement and Release by and between SteelCloud, Inc. and
Clifton W. Sink (Filed as Exhibit 10.2 to the Company’s 8-K, dated August
31, 2007 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.18
|
Amendment,
dated October 31, 2007, to Employment Agreement by and between SteelCloud,
Inc. and Kevin Murphy, dated June 8, 2004, originally filed as Exhibit
10.32 to the Company’s 10-K, dated January 26, 2005. (Filed as Exhibit
10.1 to the Company’s 8-K, dated November 1, 2007 (File No. 000-24015) and
hereby incorporated by reference).
|
|
10.19
|
Amended
2002 Employee Stock Option Plan (Filed as Exhibit 4.1 to the
Company’s S-8, dated June 25, 2007 (File No. 000-24015) and hereby
incorporated by reference).
|
|
10.20
|
Amended
Employee Stock Purchase Plan (Filed as Exhibit 4.3 to the
Company’s S-8, dated June 25, 2007 (File No. 000-24015) and hereby
incorporated by reference).
|
|
10.21
|
Form
of Restricted Stock Agreement (Filed as Exhibit 10.21 to the Company’s
10-K for the fiscal year ended October 31, 2008, filed with the Commission
on January 29, 2009 (File No. 000-24015), and hereby incorporated by
reference.).
|
|
10.22
|
Amended
2007 Stock Option and Restricted Stock Plan (Filed as Exhibit 10.21 to the
Company’s 10-K for the fiscal year ended October 31, 2008, filed with the
Commission on January 29, 2009 (File No. 000-24015), and hereby
incorporated by reference).
|
|
10.23
|
SteelCloud
MEA Joint Venture Agreement dated October 2008 (Filed as Exhibit 10.21 to
the Company’s 10-K for the fiscal year ended October 31, 2008, filed with
the Commission on January 29, 2009 (File No. 000-24015), and hereby
incorporated by reference).
|
|
10.24
|
Employment
Agreement as President and Chief Executive Officer by and between
SteelCloud, Inc. and Brian H. Hajost (Filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on February 5, 2009, and hereby
incorporated by reference).
|
|
10.25
|
Employment
Agreement Amendment by and between SteelCloud, Inc. and Kevin Murphy,
dated February 28, 2009 (filed as Exhibit 10.1 to the Company’s 8-K, filed
with the Commission on March 5, 2009, and hereby incorporated by
reference).
|
|
10.26
|
Business
Loan and Security Agreement dated as of July 1, 2009 by and between
SteelCloud, Inc. and Caledonia Capital Corporation (filed as Exhibit 10.1
to the Company’s 8-K, filed with the Commission on July 8, 2009, and
hereby incorporated by reference).
|
|
10.27
|
Secured
Promissory Note issued on July 1, 2009 by SteelCloud, Inc. to Caledonia
Capital Corporation (filed as Exhibit 10.2 to the Company’s 8-K, filed
with the Commission on July 8, 2009, and hereby incorporated by
reference).
|
|
*10.27.1 |
Addendum
(dated December 29, 2009) to Secured Promissory Note issued on July
1, 2009 by SteelCloud, Inc. to Caledonia Capital Corporation.
|
|
10.28
|
Warrant
issued on July 1, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.3 to the Company’s 8-K, filed with the
Commission on July 8, 2009, and hereby incorporated by
reference).
|
|
10.29
|
Asset
Purchase Agreement dated July 16, 2009, by and between SteelCloud, Inc.
and NCS Technologies, Inc. (filed as Exhibit 10.1 to the Company’s 8-K,
filed with the Commission on July 16, 2009, and hereby incorporated by
reference).
|
|
10.30
|
Engagement
letter dated September 3, 2009, by and between SteelCloud, Inc. and
Westminster Securities, a Division of Hudson Securities, Inc. (filed as
Exhibit 10.1 to the Company’s 8-K, filed with the Commission on September
10, 2009, and hereby incorporated by reference).
|
|
10.30.1
|
Amendment
to engagement letter dated October 28, 2009, by and between SteelCloud,
Inc. and Westminster Securities, a Division of Hudson Securities, Inc.
(Filed as Exhibit 10.30.1 to Amendment No. 6 to the Company’s Registration
Statement dated October 29, 2009 (Registration No. 333-158703) and hereby
incorporated by reference)
|
|
*10.30.2
|
Amendment
to engagement letter dated December 29, 2009, by and between SteelCloud,
Inc. and Westminster Securities, a Division of Hudson Securities,
Inc.
|
|
10.31
|
Line
of Credit and Security Agreement dated November 3, 2009 by and between
SteelCloud, Inc. and Caledonia Capital Corporation (filed as Exhibit 10.1
to the Company’s 8-K, filed with the Commission on November 9, 2009, and
hereby incorporated by reference).
|
|
10.32
|
Revolving
Line of Credit Promissory Note issued on November 3, 2009 by SteelCloud,
Inc. to Caledonia Capital Corporation (filed as Exhibit 10.2 to the
Company’s 8-K, filed with the Commission on November 9, 2009, and hereby
incorporated by reference).
|
|
10.33
|
Warrant
issued on November 4, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.3 to the Company’s 8-K, filed with the
Commission on November 9, 2009, and hereby incorporated by
reference).
|
|
10.34
|
Warrant
issued on November 23, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.1 to the Company’s 8-K, filed with the
Commission on November 23, 2009, and hereby incorporated by
reference).
|
|
*23.1
|
Consent
of Grant Thornton LLP, Independent Registered Public Accounting
Firm.
|
|
*23.2
|
Consent
of Gersten Savage LLP (incorporated in Exhibit
5.1).
|
|
99.1
|
Correspondence
from Kevin Murphy dated November 18 , 2009 (filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on November 23, 2009, and hereby
incorporated by
reference)
|
*Filed
herewith
II-5
Item 17.
|
Undertakings.
|
Insofar
as indemnification by the registrant 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 Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. If 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 a 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:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
2. That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and this offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
3. To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of this
offering;
4. 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 a 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;
5. 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 that time shall be deemed to be the initial
bona fide offering thereof.
6. That,
for the purpose of determining liability of the registrant under the Securities
Act to any purchaser in the initial distribution of the securities, the
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) any
preliminary prospectus or prospectus of an undersigned registrant relating to
this offering required to be filed pursuant to Rule 424;
(ii) any
free writing prospectus relating to this offering prepared by, or on behalf of,
the undersigned registrant or used or referred to by the undersigned
registrant;
(iii) the
portion of any other free writing prospectus relating to this offering
containing material information about an undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
II-6
(iv) any
other communication that is an offer in this offering made by the undersigned
registrant to the purchaser.
7. The
undersigned registrant hereby undertakes to file, during any period in which
offers or sales are being made, a supplement to the prospectus included in this
Registration Statement which sets forth, with respect to a particular offering,
the specific number of shares of common stock to be sold, the name of the
holder, the sales price, the name of any participating broker, dealer,
underwriter or agent, any applicable commission or discount and any other
material information with respect to the plan of distribution not previously
disclosed.
8. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-7
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
has duly caused this Amendment No. 7 to the Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Herndon, State of Virginia on December 29, 2009.
STEELCLOUD,
INC.
|
|
/s/ Brian H. Hajost
|
|
Brian
H. Hajost
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, this Amendment No. 7 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Name
|
Title
|
Date
|
||
/s/ Brian H. Hajost
|
||||
Brian
H. Hajost
|
Chief
Executive Officer and President
|
December
29, 2009
|
||
/s/Steven Snyder
|
||||
Steven
Snyder
|
Vice
President of Finance and Principal Financial Officer and
Secretary
|
December
29, 2009
|
||
/s/VADM E.A.
Burkhalter
|
||||
VADM
E. A. Burkhalter USN (Ret.)
|
Director
|
December
29, 2009
|
||
/s/James Bruno
|
||||
James
Bruno
|
Director
|
December
29, 2009
|
||
/s/Jay Kaplowitz
|
||||
Jay
Kaplowitz
|
Director
|
December
29, 2009
|
||
/s/Benjamin Krieger
|
||||
Benjamin
Krieger
|
Director
|
December
29, 2009
|
||
/s/Ashok Kaveeshwar
|
||||
Ashok
Kaveeshwar
|
Director
|
December
29, 2009
|
II-8
Exhibit
Index
Exhibit
Number
|
Description
|
|
3.1
|
Articles
of Incorporation of the Company, dated February 25, 1998, and effective as
of February 26, 1998. (Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Amendment No. 1, dated April
23, 1998 (File No. 333-47631) and hereby incorporated by
reference).
|
|
3.2
|
By-laws
of the Company, effective as of March 5, 1998. (Filed as
Exhibit 3.2 to the Company's Registration Statement on Form S-1, Amendment
No. 2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference).
|
|
4.1
|
Specimen
common stock certificate for the Company. (Filed as Exhibit 4.1
to the Company's S-8 dated July 15, 2002 (File No. 333-47631) and
hereby incorporated by reference).
|
|
4.2
|
Form
of Warrant. (Filed as Exhibit 4.2 to Amendment No. 1 to the Company’s
Registration Statement dated June 25, 2009 (Registration No. 333-158703)
and hereby incorporated by reference).
|
|
4.3
|
Form
of Placement Agent Warrant. (Filed as Exhibit 4.3 to Amendment
No. 5 to the Company’s Registration Statement dated October 23, 2009
(Registration No. 333-158703) and hereby incorporated by
reference).
|
|
4.3.1
|
Amended
Form of Placement Agent Warrant. (Filed as Exhibit 4.3.1 to
Amendment No. 6 to the Company’s Registration Statement dated October 29,
2009 (Registration No. 333-158703) and hereby incorporated by
reference).
|
|
*4.3.2
|
Amendment
No. 2 to Form of Placement Agent Warrant.
|
|
*5.1
|
Legal
Opinion of Gersten Savage LLP.
|
|
10.1
|
Employment
Agreement by and between Dunn and Thomas P. Dunne (Filed as Exhibit 99.2
to Dunn's Registration Statement on Form SB-2, Amendment 2, dated April 4,
1997 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.2
|
1997
Amended Stock Option Plan. (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1, Amendment No. 2, dated April
23, 1998 (File No. 333-92406) and hereby incorporated by
reference).
|
|
10.3
|
Agreement,
dated May 5, 1997, by and between International Data Products, Corp. and
the U.S. Air Force, the Desktop V Contract. (Filed as Exhibit
10.13 to the Company's Registration Statement on Form S-1, Amendment
No. 2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference).
|
|
10.4
|
Employee
Stock Purchase Plan. (Filed as Exhibit 10.22 to the Company’s 10-K, dated
February 16, 1999 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.5
|
Employment
Agreement by and between SteelCloud, Inc. and Kevin Murphy, dated June 8,
2004. (Filed as Exhibit 10.32 to the Company’s 10-K, dated January 26,
2005 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.6
|
Employment
Agreement by and between SteelCloud, Inc. and Brian Hajost, dated June 8,
2004. (Filed as Exhibit 10.33 to the Company’s 10-K, dated January 26,
2005 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.7
|
Sublease
by and between SteelCloud and NEC America Inc., dated September 28, 2004.
(Filed as Exhibit 10.35 to the Company’s 10-K, dated January 26, 2005 and
hereby incorporated by reference).
|
|
10.8
|
Revised
Rent Commencement Date Agreement, dated March 16, 2005 between OTR and the
Company (Filed as Exhibit 10.36 to the Company’s 10-K, dated January 30,
2006 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.9
|
Standard
Industrial Gross Lease, dated November 4, 2004 between OTR and the Company
and Lease Amendment #1, dated March 28, 2005 (Filed as Exhibit 10.37 to
the Company’s 10-K, dated January 30, 2006 (File No. 000-24015) and hereby
incorporated by reference).
|
|
10.10
|
Loan
Agreement, dated January 22, 2004, by and between SteelCloud, Inc. and
Wachovia Bank, National Association and Promissory Note
issued by SteelCloud, Inc. on March 21, 2005 to Wachovia Bank, National
Association (Filed as Exhibit 10.36 to the Company’s 10-K, dated January
30, 2006 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.11
|
Employment
Agreement by and between SteelCloud, Inc. and Clifton W. Sink (Filed as
Exhibit 10.1 to the Company’s 8-K, dated June 8, 2006 (File No. 000-24015)
and hereby incorporated by reference).
|
|
10.12
|
Separation
Agreement by and between SteelCloud, Inc. and Thomas P. Dunne (Filed as
Exhibit 10.1 to the Company’s 8-K, dated June 19, 2006 (File No.
000-24015) and hereby incorporated by reference).
|
|
10.13
|
Employment
Agreement by and between SteelCloud, Inc. and Robert Richmond (Filed as
Exhibit 10.1 to the Company’s 8-K, dated September 21, 2006 (File No.
000-24015) and hereby incorporated by
reference).
|
II-9
10.14
|
Amendment,
dated April 19, 2006, to Employment Agreement by and between SteelCloud,
Inc. and Brian Hajost, dated June 8, 2004, originally filed as Exhibit
10.33 to the Company’s 10-K, dated January 26, 2005 (Filed as Exhibit
10.42 to the Company’s 10-K, dated January 23, 2007 (File No. 000-24015)
and hereby incorporated by reference).
|
|
10.15
|
Employment
Agreement as Executive Director by and between SteelCloud, Inc. and Robert
E. Frick (Filed as Exhibit 10.1 to the Company’s 8-K, dated August 31,
2007 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.16
|
Employment
Agreement as President and Chief Executive Officer by and between
SteelCloud, Inc. and Robert E. Frick (Filed as Exhibit 10.2 to the
Company’s 8-K, dated August 31, 2007 (File No. 000-24015) and hereby
incorporated by reference).
|
|
10.17
|
Employment
Resignation Agreement and Release by and between SteelCloud, Inc. and
Clifton W. Sink (Filed as Exhibit 10.2 to the Company’s 8-K, dated August
31, 2007 (File No. 000-24015) and hereby incorporated by
reference).
|
|
10.18
|
Amendment,
dated October 31, 2007, to Employment Agreement by and between SteelCloud,
Inc. and Kevin Murphy, dated June 8, 2004, originally filed as Exhibit
10.32 to the Company’s 10-K, dated January 26, 2005. (Filed as Exhibit
10.1 to the Company’s 8-K, dated November 1, 2007 (File No. 000-24015) and
hereby incorporated by reference).
|
|
10.19
|
Amended
2002 Employee Stock Option Plan (Filed as Exhibit 4.1 to the
Company’s S-8, dated June 25, 2007 (File No. 000-24015) and hereby
incorporated by reference).
|
|
10.20
|
Amended
Employee Stock Purchase Plan (Filed as Exhibit 4.3 to the
Company’s S-8, dated June 25, 2007 (File No. 000-24015) and hereby
incorporated by reference).
|
|
10.21
|
Form
of Restricted Stock Agreement (Filed as Exhibit 10.21 to the Company’s
10-K for the fiscal year ended October 31, 2008, filed with the Commission
on January 29, 2009 (File No. 000-24015), and hereby incorporated by
reference.).
|
|
10.22
|
Amended
2007 Stock Option and Restricted Stock Plan (Filed as Exhibit 10.21 to the
Company’s 10-K for the fiscal year ended October 31, 2008, filed with the
Commission on January 29, 2009 (File No. 000-24015), and hereby
incorporated by reference).
|
|
10.23
|
SteelCloud
MEA Joint Venture Agreement dated October 2008 (Filed as Exhibit 10.21 to
the Company’s 10-K for the fiscal year ended October 31, 2008, filed with
the Commission on January 29, 2009 (File No. 000-24015), and hereby
incorporated by reference).
|
|
10.24
|
Employment
Agreement as President and Chief Executive Officer by and between
SteelCloud, Inc. and Brian H. Hajost (Filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on February 5, 2009, and hereby
incorporated by reference).
|
|
10.25
|
Employment
Agreement Amendment by and between SteelCloud, Inc. and Kevin Murphy,
dated February 28, 2009 (filed as Exhibit 10.1 to the Company’s 8-K, filed
with the Commission on March 5, 2009, and hereby incorporated by
reference).
|
|
10.26
|
Business
Loan and Security Agreement dated as of July 1, 2009 by and between
SteelCloud, Inc. and Caledonia Capital Corporation (filed as Exhibit 10.1
to the Company’s 8-K, filed with the Commission on July 8, 2009, and
hereby incorporated by reference).
|
|
10.27
|
Secured
Promissory Note issued on July 1, 2009 by SteelCloud, Inc. to Caledonia
Capital Corporation (filed as Exhibit 10.2 to the Company’s 8-K, filed
with the Commission on July 8, 2009, and hereby incorporated by
reference).
|
|
*10.27.1 |
Addendum (dated
December 29, 2009) to Secured Promissory Note issued on July 1, 2009
by SteelCloud, Inc. to Caledonia Capital
Corporation.
|
|
10.28
|
Warrant
issued on July 1, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.3 to the Company’s 8-K, filed with the
Commission on July 8, 2009, and hereby incorporated by
reference).
|
|
10.29
|
Asset
Purchase Agreement dated July 16, 2009, by and between SteelCloud, Inc.
and NCS Technologies, Inc. (filed as Exhibit 10.1 to the Company’s 8-K,
filed with the Commission on July 16, 2009, and hereby incorporated by
reference).
|
|
10.30
|
Engagement
letter dated September 3, 2009, by and between SteelCloud, Inc. and
Westminster Securities, a Division of Hudson Securities, Inc. (filed as
Exhibit 10.1 to the Company’s 8-K, filed with the Commission on September
10, 2009, and hereby incorporated by reference).
|
|
10.30.1
|
Amendment
to engagement letter dated October 28, 2009, by and between SteelCloud,
Inc. and Westminster Securities, a Division of Hudson Securities, Inc.
(Filed as Exhibit 10.30.1 to Amendment No. 6 to the Company’s Registration
Statement dated October 29, 2009 (Registration No. 333-158703) and hereby
incorporated by reference)
|
|
*10.30.2
|
Amendment
to engagement letter dated December 29, 2009, by and between SteelCloud,
Inc. and Westminster Securities, a Division of Hudson Securities,
Inc.
|
|
10.31
|
Line
of Credit and Security Agreement dated November 3, 2009 by and between
SteelCloud, Inc. and Caledonia Capital Corporation (filed as Exhibit 10.1
to the Company’s 8-K, filed with the Commission on November 9, 2009, and
hereby incorporated by reference).
|
|
10.32
|
Revolving
Line of Credit Promissory Note issued on November 3, 2009 by SteelCloud,
Inc. to Caledonia Capital Corporation (filed as Exhibit 10.2 to the
Company’s 8-K, filed with the Commission on November 9, 2009, and hereby
incorporated by reference).
|
|
10.33
|
Warrant
issued on November 4, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.3 to the Company’s 8-K, filed with the
Commission on November 9, 2009, and hereby incorporated by
reference).
|
|
10.34
|
Warrant
issued on November 23, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.1 to the Company’s 8-K, filed with the
Commission on November 23, 2009, and hereby incorporated by
reference).
|
|
*23.1
|
Consent
of Grant Thornton LLP, Independent Registered Public Accounting
Firm.
|
|
*23.2
|
Consent
of Gersten Savage LLP (incorporated in Exhibit
5.1).
|
|
99.1
|
Correspondence from Kevin Murphy dated November 18, 2009 (filed as Exhibit 10.1 to the Company’s 8-K, filed with the Commission on November 23, 2009, and hereby incorporated by reference) |
II-10