|
x
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2011; or
|
|
o
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to ________ ___________.
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CYBERDEFENDER CORPORATION
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(Exact name of registrant as specified in its charter)
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Delaware
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65-1205833
|
|
(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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617 West 7th Street, 10th Floor, Los Angeles, California 90017
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(Address of principal executive offices)
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(213) 689-8631
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(Registrant’s telephone number, including area code)
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Large accelerated filer
|
¨
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Accelerated filer
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¨
|
|
Non-accelerated filer
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¨
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(Do not check if a smaller reporting company)
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Smaller reporting company
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x
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Page Number
|
||
PART I. FINANCIAL INFORMATION
|
||
Item 1. Financial Statements (Unaudited)
|
||
Condensed Balance Sheets - September 30, 2011 and December 31, 2010
|
1
|
|
Condensed Statements of Operations - For the three and nine months ended September 30, 2011 and 2010
|
2
|
|
Condensed Statements of Cash Flows - For the nine months ended September 30, 2011 and 2010
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3
|
|
Notes to Condensed Financial Statements
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5
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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18
|
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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26
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Item 4T. Controls and Procedures
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26
|
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PART II. OTHER INFORMATION
|
||
Item 1. Legal Proceedings
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27
|
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Item 1A. Risk Factors
|
27
|
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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27
|
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Item 3. Defaults Upon Senior Securities
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27
|
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Item 6. Exhibits
|
28
|
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Signatures
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29
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September 30,
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December 31,
|
|||||||
2011
|
2010
|
|||||||
ASSETS
|
||||||||
Current assets
|
||||||||
Cash
|
$ | 1,546,221 | $ | 2,649,061 | ||||
Restricted cash
|
2,255,074 | 3,079,394 | ||||||
Accounts receivable
|
1,688,276 | 2,385,920 | ||||||
Deferred financing costs, current
|
124,241 | 103,484 | ||||||
Prepaid expenses
|
174,225 | 195,258 | ||||||
Deferred charges, current
|
335,174 | 1,147,764 | ||||||
Total current assets
|
6,123,211 | 9,560,881 | ||||||
Property and equipment, net
|
1,508,744 | 1,742,675 | ||||||
Deferred financing costs, net of current portion
|
- | 6,377 | ||||||
Deferred charges, net of current portion
|
41,467 | 402,772 | ||||||
Other assets
|
288,225 | 269,314 | ||||||
Total assets
|
$ | 7,961,647 | $ | 11,982,019 | ||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 5,794,669 | $ | 6,275,896 | ||||
Accounts payable and accrued expenses – related party
|
3,140,890 | 1,447,257 | ||||||
Accrued expenses
|
1,887,959 | 1,788,435 | ||||||
Deferred revenue, current
|
13,707,888 | 11,342,211 | ||||||
Convertible notes payable – related party, net of discount
|
10,458,924 | - | ||||||
Capital lease obligations, current
|
129,552 | 137,435 | ||||||
Total current liabilities
|
35,119,882 | 20,991,234 | ||||||
Deferred rent
|
804,777 | 466,920 | ||||||
Deferred revenue, less current portion
|
4,841,681 | 4,116,442 | ||||||
Convertible notes payable – related party
|
150,000 | 9,825,056 | ||||||
Convertible notes payable, net of discount
|
1,554,059 | - | ||||||
Capital lease obligations, less current portion
|
78,856 | 168,572 | ||||||
Total liabilities
|
42,549,255 | 35,568,224 | ||||||
Stockholders’ deficit:
|
||||||||
Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
|
- | - | ||||||
Common stock, par value $0.001; 100,000,000 shares authorized; 27,916,440 and 27,327,702 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
|
28,115 | 27,328 | ||||||
Treasury stock at par value, 199,287 shares
|
(199 | ) | - | |||||
Additional paid-in capital
|
67,511,341 | 60,926,037 | ||||||
Accumulated deficit
|
(102,126,865 | ) | (84,539,570 | ) | ||||
Total stockholders’ deficit
|
(34,587,608 | ) | (23,586,205 | ) | ||||
Total liabilities and stockholders’ deficit
|
$ | 7,961,647 | $ | 11,982,019 |
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
September 30,
|
September 30,
|
|||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Net revenue:
|
||||||||||||||||
Services
|
$ | 7,345,340 | $ | 7,928,021 | $ | 25,882,764 | $ | 17,592,282 | ||||||||
Software and other
|
4,441,209 | 4,818,082 | 14,000,275 | 14,343,737 | ||||||||||||
Total net revenue
|
11,786,549 | 12,746,103 | 39,883,039 | 31,936,019 | ||||||||||||
Cost of revenue:
|
||||||||||||||||
Services
|
3,935,382 | 5,616,316 | 16,588,621 | 12,348,299 | ||||||||||||
Software and other
|
152,132 | 217,581 | 727,271 | 654,449 | ||||||||||||
Total cost of revenue
|
4,087,514 | 5,833,897 | 17,315,892 | 13,002,748 | ||||||||||||
Gross profit
|
7,699,035 | 6,912,206 | 22,567,147 | 18,933,271 | ||||||||||||
Operating expenses:
|
||||||||||||||||
Media and marketing services
|
5,145,098 | 5,954,673 | 17,074,771 | 16,038,652 | ||||||||||||
Media and marketing services – related party
|
175,534 | 6,500,634 | 861,766 | 18,623,694 | ||||||||||||
Product development
|
571,289 | 742,207 | 2,334,051 | 2,457,726 | ||||||||||||
Selling, general and administrative
|
4,610,523 | 4,252,866 | 15,574,806 | 11,402,399 | ||||||||||||
Depreciation and amortization
|
111,353 | 51,867 | 316,709 | 127,012 | ||||||||||||
Total operating expenses
|
10,613,797 | 17,502,247 | 36,162,103 | 48,649,483 | ||||||||||||
Loss from operations
|
(2,914,762 | ) | (10,590,041 | ) | (13,594,956 | ) | (29,716,212 | ) | ||||||||
Interest expense – related party
|
(1,866,870 | ) | (279,382 | ) | (3,620,971 | ) | (556,080 | ) | ||||||||
Interest expense, net
|
(255,318 | ) | (11,897 | ) | (268,651 | ) | (945,116 | ) | ||||||||
Loss on securities modifications
|
- | - | (102,717 | ) | - | |||||||||||
Net loss
|
$ | (5,036,950 | ) | $ | (10,881,320 | ) | $ | (17,587,295 | ) | $ | (31,217,408 | ) | ||||
Basic and fully diluted net loss per share
|
$ | (0.18 | ) | $ | (0.40 | ) | $ | (0.63 | ) | $ | (1.18 | ) | ||||
Weighted average shares outstanding:
|
||||||||||||||||
Basic and fully diluted
|
27,745,673 | 27,027,189 | 27,832,353 | 26,408,814 |
For the Nine Months Ended
|
||||||||
September 30,
2011
|
September 30,
2010
|
|||||||
OPERATING ACTIVITIES:
|
||||||||
Net loss
|
$ | (17,587,295 | ) | $ | (31,217,408 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
Amortization of debt discount
|
219,586 | 621,000 | ||||||
Amortization of debt discount – related party
|
1,818,253 | 302,143 | ||||||
Depreciation and amortization
|
316,709 | 127,012 | ||||||
Compensation expense from vested stock options
|
913,457 | 700,569 | ||||||
Amortization of deferred financing costs
|
58,233 | 186,992 | ||||||
Warrants issued for media and marketing services – related party
|
- | 18,321,762 | ||||||
Shares and warrants issued for services
|
354,147 | 592,765 | ||||||
Loss on GRM warrants and other securities modifications
|
1,077,330 | - | ||||||
Loss on disposal of fixed assets
|
14,453 | - | ||||||
Changes in operating assets and liabilities:
|
||||||||
Restricted cash
|
824,320 | (954,374 | ) | |||||
Accounts receivable
|
697,644 | (1,543,260 | ) | |||||
Prepaid expenses
|
21,033 | (4,826 | ) | |||||
Deferred charges
|
1,173,895 | 1,662,923 | ||||||
Other assets
|
(18,911 | ) | (213,967 | ) | ||||
Accounts payable and accrued expenses
|
878,108 | 2,923,630 | ||||||
Accounts payable and accrued expenses – related party
|
1,693,633 | 695,409 | ||||||
Deferred revenue
|
3,090,916 | 3,384,125 | ||||||
Cash Flows Used In Operating Activities:
|
(4,454,489 | ) | (4,415,505 | ) | ||||
INVESTING ACTIVITIES:
|
||||||||
Purchase of property and equipment
|
(92,809 | ) | (1,264,231 | ) | ||||
Cash Flows Used In Investing Activities
|
(92,809 | ) | (1,264,231 | ) | ||||
FINANCING ACTIVITIES:
|
||||||||
Proceeds from convertible notes payable and notes payable, net of costs
|
2,950,712 | 4,948,982 | ||||||
Principal payments on capital lease obligations
|
(102,021 | ) | (70,022 | ) | ||||
Proceeds from exercise of stock options
|
6,929 | 62,392 | ||||||
Proceeds from exercise of stock warrants, net of placement fees
|
588,838 | 186,575 | ||||||
Cash Flows Provided by Financing Activities
|
3,444,458 | 5,127,927 | ||||||
NET DECREASE IN CASH
|
(1,102,840 | ) | (551,809 | ) | ||||
CASH, beginning of period
|
2,649,061 | 3,357,510 | ||||||
CASH, end of period
|
$ | 1,546,221 | $ | 2,805,701 |
For the Nine Months Ended
|
||||||||
September 30,
2011
|
September 30,
2010
|
|||||||
Supplemental disclosures of cash flow information:
|
||||||||
Income taxes paid
|
$ | 800 | $ | 800 | ||||
Cash paid for interest
|
$ | 20,299 | $ | 121,501 | ||||
Supplemental schedule of non-cash investing and financing activities:
|
||||||||
Beneficial conversion feature and shares issued accounted for as discount on notes payable
|
$ | 3,645,191 | $ | 908,571 | ||||
Property and equipment acquired through capital lease obligations
|
$ | 4,422 | $ | 336,600 | ||||
Conversion of notes payable and accrued interest to common stock
|
$ | - | $ | 2,313,139 | ||||
Conversion of interest, fees and accounts payable to debt
|
$ | 994,567 | $ | - | ||||
Contribution of shares of common stock from former CEO at par value
|
$ | 2,000 | $ | - |
|
i.
|
persuasive evidence of an arrangement exists,
|
|
ii.
|
the product or service has been delivered,
|
|
iii.
|
the fee is fixed or determinable, and
|
|
iv.
|
collection of the resulting receivable is reasonably assured.
|
|
•
|
Level one — Quoted market prices in active markets for identical assets or liabilities;
|
|
•
|
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
|
|
•
|
Level three — Unobservable inputs developed using estimates and assumptions which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
Nine Months Ended
|
||||||||||||||||||||||||
September 30, 2011
|
September 30, 2010
|
|||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||
Number
|
Average
|
Aggregate
|
Number
|
Average
|
Aggregate
|
|||||||||||||||||||
of
|
Exercise
|
Intrinsic
|
Of
|
Exercise
|
Intrinsic
|
|||||||||||||||||||
Warrants
|
Price
|
Value
|
Warrants
|
Prices
|
Value
|
|||||||||||||||||||
Outstanding, beginning of period
|
18,723,313 | $ | 1.22 | 13,026,657 | $ | 1.20 | ||||||||||||||||||
Issued
|
1,666,667 | $ | 0.375 | 6,038,636 | $ | 1.25 | ||||||||||||||||||
Exercised
|
(786,256 | ) | $ | 1.11 | (159,150 | ) | $ | 1.23 | ||||||||||||||||
Expired
|
(1,871,692 | ) | $ | 1.00 | - | - | ||||||||||||||||||
Outstanding, end of period
|
17,732,032 | $ | 0.63 | $ | 600,000 | 18,906,143 | $ | 1.23 | $ | 49,828,886 | ||||||||||||||
Exercisable, end of period
|
16,065,365 | $ | 0.65 | $ | 600,000 | 18,906,143 | $ | 1.23 | $ | 49,828,886 |
Weighted
|
||||||||
Average
|
||||||||
Number of
|
Remaining
|
|||||||
Warrant
|
Contractual
|
|||||||
Exercise Price
|
Shares
|
Life (Years)
|
||||||
$ 0.30
|
10,000,000 | 2.5 | ||||||
$ 0.375
|
1,666,667 | 2.5 | ||||||
$ 1.00
|
302,881 | 1.3 | ||||||
$ 1.01
|
700,306 | 4.2 | ||||||
$ 1.20
|
221,750 | 1.4 | ||||||
$ 1.25
|
4,580,438 | 1.1 | ||||||
$ 1.80
|
2,500 | 2.6 | ||||||
$ 1.83
|
125,000 | 2.6 | ||||||
$ 2.05
|
77,490 | 3.0 | ||||||
$ 2.18
|
55,000 | 1.0 | ||||||
17,732,032 |
Nine Months
|
||||||||||||||||||||||||||||||||
September 30, 2011
|
September 30, 2010
|
|||||||||||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||||||||||
Weighted
|
Average
|
Weighted
|
Average
|
|||||||||||||||||||||||||||||
Number
|
Average
|
Remaining
|
Aggregate
|
Number
|
Average
|
Remaining
|
Aggregate
|
|||||||||||||||||||||||||
Of
|
Exercise
|
Contractual
|
Intrinsic
|
of
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||||||||||||||
Options
|
Price
|
Term
|
Value
|
Options
|
Prices
|
Term
|
Value
|
|||||||||||||||||||||||||
Outstanding, beginning of period
|
2,735,896 | $ | 2.07 | 7.62 | 1,856,293 | $ | 1.09 | 7.57 | ||||||||||||||||||||||||
Granted
|
538,000 | $ | 1.44 | 7.60 | 938,626 | $ | 3.65 | 9.55 | ||||||||||||||||||||||||
Exercised
|
(46,500 | ) | $ | 0.15 | 3.53 | (73,200 | ) | $ | 0.85 | 5.71 | ||||||||||||||||||||||
Forfeited
|
(533,774 | ) | $ | 3.45 | (69,500 | ) | $ | 2.28 | ||||||||||||||||||||||||
Outstanding, end of period
|
2,693,622 | $ | 1.70 | 6.77 | $ | 76,736 | 2,652,219 | $ | 1.97 | 7.77 | $ | 5,137,768 | ||||||||||||||||||||
Exercisable, end of period
|
2,039,293 | $ | 1.37 | 6.09 | $ | 76,736 | 1,586,269 | $ | 1.11 | 6.84 | $ | 4,359,134 | ||||||||||||||||||||
Vested, exercisable and expected to vest in the future
|
2,507,990 | $ | 1.63 | 6.60 | $ | 76,736 | 2,456,463 | $ | 1.78 | 7.65 | $ | 5,203,768 |
September 30, 2011
|
December 31, 2010
|
|||||||
GR Note
|
5,793,342 | 5,541,183 | ||||||
2011 GR Note
|
5,878,588 | - | ||||||
Credit Facility
|
- | 5,039,230 | ||||||
9% Notes
|
2,240,412 | |||||||
10.5% Note
|
1,000,000 | |||||||
Unamortized discount
|
(2,749,359 | ) | (755,357 | ) | ||||
Convertible notes payable, net
|
$ | 12,162,983 | $ | 9,825,056 |
|
·
|
changes in local, state or federal regulations that will adversely affect our business;
|
|
·
|
our ability to raise capital as and when we need it;
|
|
·
|
our ability to market and distribute or sell our products;
|
|
·
|
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
|
|
·
|
whether we will continue to receive the services of certain officers and directors; and
|
|
·
|
other uncertainties, all of which are difficult to predict and many of which are beyond our control.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
·
|
New leadership. The Board of Directors has reached an agreement in principle to appoint Mr. Greg Thomas as chief executive officer for a period of twelve months
|
|
·
|
Focusing strategic efforts on high-growth LiveTech service offerings
|
|
·
|
Discontinuing the development of proprietary software intended for sale to consumers
|
|
·
|
Improving software product offerings via third party licensing arrangements
|
|
·
|
Increasing focus on optimizing operations to accelerate profitability
|
|
·
|
Reducing overhead and call center operational costs while improving overall customer experience
|
|
·
|
Augmenting our management team with additional expertise from direct response industry veterans who are charged with improving results, accountability and profit performance
|
|
·
|
The Company expects to continue to operate its own in-house technical support call center for our LiveTech remote computer repair service
|
Contractual Obligations
|
Payments Due By Period
|
|||||||||||||||||||
Total
|
Less than 1 year
|
1 to 3 Years
|
3 to 5 Years
|
Over 5 Years
|
||||||||||||||||
Debt obligations
|
$ | 14,912,342 | $ | 11,671,930 | $ | 3,240,412 | $ | - | $ | - | ||||||||||
Capital lease obligations
|
$ | 233,954 | $ | 140,819 | $ | 93,135 | $ | - | $ | - | ||||||||||
Operating lease obligations
|
$ | 8,292,936 | $ | 878,152 | $ | 1,822,505 | $ | 1,929,900 | $ | 3,662,379 |
Quarter Ended
|
Net Revenue
|
Cumulative
Deferred
Revenue
|
||||||
31-Mar-10
|
$ | 9,477,330 | $ | 11,619,760 | ||||
30-Jun-10
|
9,712,586 | $ | 12,081,434 | |||||
30-Sep-10
|
12,746,103 | $ | 14,163,271 | |||||
31-Dec-10
|
13,632,526 | $ | 15,458,653 | |||||
Fiscal Year 2010 Total
|
$ | 45,568,545 | ||||||
31-Mar-11
|
$ | 15,375,893 | $ | 18,320,111 | ||||
30-Jun-11
|
$ | 12,720,597 | $ | 18,679,025 | ||||
30-Sep-11
|
$ | 11,786,549 | $ | 18,249,570 | ||||
Fiscal Year 2011 Total
|
$ | 39,883,039 |
Quarter Ended
|
Software
|
Services
|
Ancillary
|
Renewals
|
Total
|
|||||||||||||||||||||||||||||||
31-Mar-10
|
$ | 4,092,152 | 35 | % | $ | 5,802,486 | 49 | % | $ | 856,297 | 7 | % | $ | 1,062,473 | 9 | % | $ | 11,813,408 | ||||||||||||||||||
30-Jun-10
|
3,504,147 | 28 | % | 6,967,067 | 56 | % | 568,525 | 5 | % | 1,389,064 | 11 | % | 12,428,803 | |||||||||||||||||||||||
30-Sep-10
|
4,155,264 | 22 | % | 11,706,203 | 63 | % | 501,721 | 3 | % | 2,196,572 | 12 | % | 18,559,760 | |||||||||||||||||||||||
31-Dec-10
|
3,944,197 | 21 | % | 12,780,949 | 67 | % | 493,886 | 3 | % | 1,890,599 | 10 | % | 19,109,631 | |||||||||||||||||||||||
Fiscal Year 2010 Totals
|
$ | 15,695,760 | 25 | % | $ | 37,256,705 | 60 | % | $ | 2,420,429 | 4 | % | $ | 6,538,708 | 11 | % | $ | 61,911,602 | ||||||||||||||||||
31-Mar-11
|
$ | 4,696,930 | 22 | % | $ | 13,971,456 | 65 | % | $ | 478,516 | 2 | % | $ | 2,450,982 | 11 | % | $ | 21,597,884 | ||||||||||||||||||
30-Jun-11
|
$ | 2,867,130 | 18 | % | $ | 9,694,401 | 63 | % | $ | 248,564 | 2 | % | $ | 2,689,628 | 17 | % | $ | 15,499,723 | ||||||||||||||||||
30-Sep-11
|
$ | 2,608,266 | 19 | % | $ | 8,634,042 | 62 | % | $ | 138,721 | 1 | % | $ | 2,439,091 | 18 | % | $ | 13,820,120 | ||||||||||||||||||
Fiscal Year 2011 Totals
|
$ | 10,172,326 | 20 | % | $ | 32,299,899 | 63 | % | $ | 865,801 | 2 | % | $ | 7,579,701 | 15 | % | $ | 50,917,727 |
Nine Months Ended September 30,
|
||||||||||||||||
|
2011
|
2010
|
||||||||||||||
1 Year - Software sales
|
$ | 8,999,437 | 21 | % | $ | 10,893,692 | 29 | % | ||||||||
Multi-year - Software sales
|
1,172,889 | 3 | % | 857,871 | 2 | % | ||||||||||
One-Time/1 Year - Services sales
|
10,421,740 | 24 | % | 8,448,674 | 22 | % | ||||||||||
Multi-year - Services sales
|
21,807,780 | 50 | % | 16,027,082 | 42 | % | ||||||||||
Ancillary Sales
|
865,801 | 2 | % | 1,926,543 | 5 | % | ||||||||||
Total
|
$ | 43,267,648 | $ | 38,153,862 |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Gross Sales
|
$ | 13,820,120 | $ | 18,559,760 | $ | 50,917,727 | $ | 42,801,971 | ||||||||
Less: Refunds
|
(1,433,312 | ) | (2,455,713 | ) | (5,603,873 | ) | (5,411,358 | ) | ||||||||
Less: Uncollected EZ pay
|
(729,714 | ) | (1,276,108 | ) | (2,639,899 | ) | (2,070,470 | ) | ||||||||
Less: Change in deferred revenue
|
129,455 | (2,081,836 | ) | (2,790,917 | ) | (3,384,124 | ) | |||||||||
Net revenue
|
$ | 11,786,549 | $ | 12,746,103 | $ | 39,883,038 | $ | 31,936,019 |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
Change in
|
Change in
|
|||||||||||||||||||||||||||||||
|
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net revenue
|
$ | 11,786,549 | $ | 12,746,103 | $ | (959,554 | ) | (8 | )% | $ | 39,883,039 | $ | 31,936,019 | $ | 7,947,020 | 25 | % |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
Change in
|
Change in
|
|||||||||||||||||||||||||||||||
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
|||||||||||||||||||||||||
Cost of revenue
|
$ | 4,087,514 | $ | 5,833,897 | $ | (1,746,383 | ) | (30 | )% | $ | 17,315,892 | $ | 13,002,748 | $ | 4,313,144 | 33 | % |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Media and marketing services
|
$ | 5,145,097 | $ | 5,954,673 | $ | (809,576 | ) | (14 | )% | $ | 17,074,770 | $ | 16,038,652 | $ | 1,036,118 | 6 | % |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Media and marketing services – related party
|
$ | 175,534 | $ | 6,500,634 | $ | (6,325,100 | ) | (97 | )% | $ | 861,766 | $ | 18,623,694 | $ | (17,761,928 | ) | (95 | )% |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Product Development
|
$ | 571,289 | $ | 742,207 | $ | (170,918 | ) | (23 | )% | $ | 2,334,051 | $ | 2,457,726 | $ | (123,675 | ) | (5 | )% |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
S,G & A
|
$ | 4,610,523 | $ | 4,252,866 | $ | 357,657 | 8 | % | $ | 15,574,806 | $ | 11,402,399 | $ | 4,172,407 | 37 | % |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Loss from operations
|
$ | 2,914,762 | $ | 10,590,041 | $ | (7,675,279 | ) | (72 | )% | $ | 13,594,956 | $ | 29,716,212 | $ | (16,121,256 | ) | (54 | )% |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
Change in
|
Change in
|
|||||||||||||||||||||||||||||||
|
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Interest expense, net (including related party)
|
$ | 2,122,188 | $ | 291,279 | $ | 1,830,909 | 629 | % | $ | 3,889,622 | $ | 1,501,196 | $ | 2,388,426 | 159 | % |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
Change in
|
Change in
|
|||||||||||||||||||||||||||||||
2011
|
2010
|
$
|
%
|
2011
|
2010
|
$
|
%
|
|||||||||||||||||||||||||
Net loss
|
$ | 5,036,950 | $ | 10,881,320 | $ | (5,844,370 | ) | (54 | )% | $ | 17,587,295 | $ | 31,217,408 | $ | (13,630,113 | ) | (44 | )% |
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
ITEM 1A.
|
RISK FACTORS
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
3.1
|
Certificate of Incorporation (1)
|
|
3.2
|
Bylaws (1)
|
|
10.1
|
Waiver and Forbearance Agreement dated September 30, 2011 between the registrant and GR Match, LLC (2)
|
|
10.2
|
8,000,000 Shares Warrant between the registrant and GR Match, LLC (2)
|
|
10.3
|
First 1,000,000 Shares Warrant between the registrant and GR Match, LLC (2)
|
|
10.4
|
Second 1,000,000 Shares Warrant between the registrant and GR Match, LLC (2)
|
|
10.5
|
Form of 9% Subordinated Convertible Promissory Note (2)
|
|
10.6
|
Form of Securities Purchase Agreement (2)
|
|
10.7
|
Form of Subordination Agreement (2)
|
|
10.8
|
Form of Security Agreement (2)
|
|
10.9
|
Form of 9% Subordinated Convertible Promissory Note issued to the registrant’s directors (3)
|
|
10.10
|
Form of Securities Purchase Agreement executed by the registrant’s directors (3)
|
|
10.11
|
Form of 10.5% Subordinated Convertible Promissory Note*
|
|
10.12
|
Form of Securities Purchase Agreement*
|
|
10.13
|
Form of Warrant*
|
|
10.14
|
Form of Securities Purchase Agreement (4)
|
|
10.15
|
Form of Warrant (4)
|
|
31.1
|
Certification Pursuant to Rule 13a-14(a) and 15d-14(a)*
|
|
31.2
|
Certification Pursuant to Rule 13a-14(a) and 15d-14(a)*
|
|
32
|
Certification Pursuant to Section 1350 of Title 18 of the United States Code*
|
(1)
|
Incorporated by reference from the Registration Statement on Form S-3, File No. 333-167910, filed with the Securities and Exchange Commission on September 30, 2010.
|
(2)
|
Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2011.
|
(3)
|
Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 14, 2011.
|
(4)
|
Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 24, 2011.
|
CYBERDEFENDER CORPORATION
|
||
By:
|
/s/ Kevin Harris
|
|
Date: November 14, 2011
|
Kevin Harris, Interim Chief Executive Officer
|
|
By:
|
/s/ Kevin Harris
|
|
Date: November 14, 2011
|
Kevin Harris, Chief Financial Officer
|
|
a)
|
designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
c)
|
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
d)
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
(a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
(b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
/s/ Kevin Harris
|
||
Kevin Harris
|
||
Interim Chief Executive Officer
|
|
a)
|
designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
c)
|
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
d)
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
(a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
(b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
/s/ Kevin Harris
|
||
Kevin Harris
|
||
Chief Financial Officer
|
/s/ Kevin Harris
|
||
Kevin Harris
|
||
Interim Chief Executive Officer
|
CONDENSED BALANCE SHEETS [Parenthetical] (USD $) | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Preferred stock, par value (in dollar per shares) | $ 0.001 | $ 0.001 |
Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock,par value (in dollars per share) | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 100,000,000 | 100,000,000 |
Common stock, shares issued | 27,916,440 | 27,327,702 |
Common stock, shares outstanding | 27,916,440 | 27,327,702 |
Treasury stock, shares outstanding | 199,287 | 0 |
CONDENSED STATEMENTS OF OPERATIONS (USD $) | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Net revenue: | ||||
Services | $ 7,345,340 | $ 7,928,021 | $ 25,882,764 | $ 17,592,282 |
Software and other | 4,441,209 | 4,818,082 | 14,000,275 | 14,343,737 |
Total net revenue | 11,786,549 | 12,746,103 | 39,883,039 | 31,936,019 |
Cost of revenue: | ||||
Services | 3,935,382 | 5,616,316 | 16,588,621 | 12,348,299 |
Software and other | 152,132 | 217,581 | 727,271 | 654,449 |
Total cost of revenue | 4,087,514 | 5,833,897 | 17,315,892 | 13,002,748 |
Gross profit | 7,699,035 | 6,912,206 | 22,567,147 | 18,933,271 |
Operating expenses: | ||||
Media and marketing services | 5,145,098 | 5,954,673 | 17,074,771 | 16,038,652 |
Media and marketing services - related party | 175,534 | 6,500,634 | 861,766 | 18,623,694 |
Product development | 571,289 | 742,207 | 2,334,051 | 2,457,726 |
Selling, general and administrative | 4,610,523 | 4,252,866 | 15,574,806 | 11,402,399 |
Depreciation and amortization | 111,353 | 51,867 | 316,709 | 127,012 |
Total operating expenses | 10,613,797 | 17,502,247 | 36,162,103 | 48,649,483 |
Loss from operations | (2,914,762) | (10,590,041) | (13,594,956) | (29,716,212) |
Interest expense - related party | (1,866,870) | (279,382) | (3,620,971) | (556,080) |
Interest expense, net | (255,318) | (11,897) | (268,651) | (945,116) |
Loss on securities modifications | 0 | 0 | (1,077,330) | 0 |
Net loss | $ (5,036,950) | $ (10,881,320) | $ (17,587,295) | $ (31,217,408) |
Basic and fully diluted net loss per share (in dollars per share) | $ (0.18) | $ (0.40) | $ (0.63) | $ (1.18) |
Weighted average shares outstanding: | ||||
Basic and fully diluted (in shares) | 27,745,673 | 27,027,189 | 27,832,353 | 26,408,814 |
DOCUMENT AND ENTITY INFORMATION | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Nov. 07, 2011 | |
Entity Registrant Name | CYBERDEFENDER CORP | |
Entity Central Index Key | 0001377720 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Smaller Reporting Company | |
Trading Symbol | cyde | |
Entity Common Stock, Shares Outstanding | 27,916,440 | |
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Sep. 30, 2011 | |
Document Fiscal Period Focus | Q3 | |
Document Fiscal Year Focus | 2011 |
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EMPLOYEE BENEFIT PLANS | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Compensation and Retirement Disclosure [Abstract] | |
Compensation and Employee Benefit Plans [Text Block] | NOTE 6 - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan under 401(k) of the Internal Revenue Code that covers employees meeting certain service requirements. The total amount contributed by the Company to the plans is determined by the plan provisions. During the three and nine months ended September 30, 2011, the cost of Company matching contributions was $18,625 and $71,186, respectively. During the three and nine months ended September 30, 2010, the cost of Company matching contributions was $32,309 and $66,163, respectively.
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 9 Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | ||||||||||||||||||||||
Accounting Policies [Abstract] | ||||||||||||||||||||||
Business Description and Accounting Policies [Text Block] | NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The Company, based in Los Angeles, California, markets and provides remote technical support services, antimalware software, online backup services and computer optimization software to the consumer and small business market. The Company markets its products directly to consumers through multiple channels including television, radio, the Internet and print. The Company’s goal is to be a leading provider of advanced technology solutions to protect consumers and small businesses against threats such as Internet viruses, spyware and identity theft, and to provide remote technical resolution services.
CyberDefender's premier offering is LiveTech, its remote technical support service. LiveTech technicians are available to address computer problems that cannot be resolved with simple do-it-yourself software. Our technicians connect to customers’ computers using popular remote access software and provide our customers with quick and reliable computer repair. Repair and optimization services include (but are not limited to) malware removal, speed optimization, software updates, file backup, privacy settings and hardware troubleshooting.
CyberDefender products and services also include CyberDefender Early Detection Center, a comprehensive antispyware and antivirus security software suite; CyberDefender Registry Cleaner, a computer optimization software suite; PC Checkup, a free diagnosis software which identifies a variety common PC performance issues; and CyberDefender Online Backup, a cloud-based data backup service.
Liquidity and Going Concern
The Company has experienced operating losses for the last five fiscal years. Management is implementing a strategic repositioning plan to continue to build its revenue base, expand sales and marketing and improve operations, however, through September 30, 2011, the Company continued to operate at negative cash flow. For the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company has incurred a net loss of $17.6 million and $39.6 million, respectively. As of September 30, 2011 and December 31, 2010, the Company had an accumulated deficit in retained earnings of $102.1 million and $84.5 million, respectively. To date, the Company's operations have been primarily financed through debt and equity proceeds from private placement offerings. As part of the Company’s strategic repositioning plan that was announced publicly on August 2, 2011, the Company’s board of directors has reached an agreement in principle with Greg Thomas, currently a consultant to the Company, to appoint Mr. Thomas as chief executive officer for a period of twelve months. In the meantime, Kevin Harris, the Company’s chief financial officer and secretary, is serving as interim chief executive officer. The appointment of Mr. Harris followed the resignation, on August 1, 2011, of Gary Guseinov from his positions as chief executive officer and chairman of the board of directors. The Company believes that its repositioning strategy will allow the Company to rely on its strong direct to consumer marketing expertise to strengthen its position as a leading provider of remote technical support services.
During the third quarter, the Company closed two private offerings of subordinated convertible promissory notes to accredited investors, totaling $3.2 million with a commitment for another $2.0 million, as described in Note 5 below. The Company believes, but cannot insure, that the $5.2 million will be sufficient to permit the Company to continue to operate until it can secure the additional financing that it requires to continue to operate as a going concern and to repay the approximately $11.7 million of debt owed to GR Match, LLC (“GRM”) due on March 31, 2012. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern; however, if additional financing is not secured, it would raise substantial doubt about the Company’s ability to continue as a going concern. We are presently engaged in active discussions with existing and prospective investors to secure additional financing, but there are no commitments at this time (with the exception of the commitment for $2.0 million discussed above) and we can give no assurance that the additional financing can be secured on favorable terms, or at all. If we cannot obtain additional financing, we may be forced to further curtail our operations, or possibly be forced to evaluate a sale of the Company or consider other alternatives, such as bankruptcy. Even if we are successful in securing additional financing, there is no assurance regarding the terms of any additional investment and any such investment or other strategic alternative would likely substantially dilute our current stockholders.
On September 30, 2011, and effective as of September 23, 2011, the Company and GRM entered into a Second Waiver and Forbearance Agreement (the “Agreement”). Pursuant to the Agreement, the Company, among other things: (i) acknowledged its failure to make interest payments payable on July 1, 2011 under that certain 9% Secured Convertible Promissory Note dated March 31, 2010 and issued by the Company in favor of GRM; (ii) acknowledged its failure to make interest payments payable on July 1, 2011 under that certain Amended and Restated 9% Secured Convertible Promissory Note dated February 25, 2011 and issued by the Company in favor of GRM (together, the “Notes”); and (iii) acknowledged certain other defaults in connection with the Notes. Pursuant to the Agreement, GRM, among other things, agreed: (i) to capitalize the unpaid interest payments described above and payable on July 1, 2011 conditioned upon the Company’s payment of the interest payments due October 1, 2011 on the Notes; (ii) for a period of one hundred and twenty days through and including January 24, 2012, and for that period only, to waive its rights and remedies under the Notes and certain related documents and not to assert that the Company is in default of the Notes and related documents. Pursuant to the Agreement, GRM’s waiver and forbearance are conditioned upon the Company’s compliance with its obligations under the Notes and related documents, subject to certain exclusions. In the event of the Company’s default, GRM reserves the right to terminate the Agreement and pursue its rights and remedies with respect to any previously existing or subsequent default. There can be no assurance that GRM will agree to extend the waiver period beyond 120 days. If the waiver period is not extended, or if the Company defaults in its obligations under the Agreement, GRM will be able to pursue all of its rights and remedies against the Company resulting from the defaults. In consideration for the Agreement the Company agreed to amend GRM’s warrants reducing the exercise price from $1.25 to $0.30.
Pursuant to the Agreement, GRM also agreed to consider, in good faith, exercising that number of its outstanding warrants necessary to acquire shares of the Company’s common stock having an aggregate exercise price of at least $1 million if the Company is profitable for any future quarterly period and a material adverse change has not occurred after the date of the Agreement.
In addition, the Company has entered into arrangements with certain of its vendors pursuant to which the vendors and the Company have agreed for payments of amounts owed to the vendors and the vendors have agreed to forbear from asserting their rights and remedies against the Company, provided that the payments are made in a timely manner. If the Company is unable to secure additional financing, there can be no assurance that the unsecured creditors would continue to forbear from asserting their legal rights and remedies against the Company for amounts the Company owes.
Reclassification
To conform to the current year's presentation, the Company reported as separate items related party expenses for media and marketing service and interest expense. These reclassifications had no effect on the previously reported net loss for 2010.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management are, among others, collectibility of accounts receivable, recoverability of prepaid expenses, deferred charges and property and equipment, value of shares and options/warrants granted, valuation of deferred tax assets and recognition of revenue. Actual results could differ from those estimates and assumptions.
Accounts Receivable
The Company offers a payment plan to its customers for the purchase of multi-year LiveTech service plans. The payment plan allows customers to pay in three installments over sixty days. The Company does not believe an allowance for doubtful accounts is necessary due to the short duration of payment terms on amounts recorded as revenue.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets ranging from three to ten years, using the straight-line method. Amortization of leasehold improvements is provided over the shorter of the estimated useful lives of the improvements or the term of the lease.
Equipment under Capital Lease
The Company leases certain of its furniture and other equipment under agreements accounted for as capital leases. The assets and liabilities under capital lease are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets under lease. Assets under capital lease are depreciated using the straight-line method over their estimated useful lives.
Internal Use Software
Certain costs related to computer software developed or obtained for internal use are capitalized. The Company capitalizes only those direct costs incurred during the application development and implementation stages for developing, purchasing or otherwise acquiring software solely to meet the Company’s internal needs. Capitalized costs will be amortized on a straight-line basis over the estimated useful lives of the underlying software, which generally are three years. The Company capitalized $0.6 million of costs which are included in property and equipment on the accompanying balance sheet as of September 30, 2011 and December 31, 2010.
Revenue Recognition
The Company sells off-the-shelf software products and technical support services.
The Company recognizes revenue in accordance with GAAP from the sale of software licenses under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 985, “Software.”
Specifically, the Company recognizes revenues from its products when all of the following conditions for revenue recognition are met:
As part of the sales price of some of its software licenses, the Company provides renewable product support and content updates, which are separate components of product licenses and sales. Term licenses allow customers to use the Company’s products and receive product support coverage and content updates for a specified period, generally twelve months. The Company invoices for product support, content updates and term licenses at the beginning of the term. These revenues contain multiple element arrangements where “vendor specific objective evidence” (“VSOE”) may not exist for one or more of the elements. Certain of the Company’s software licenses are in substance a subscription and therefore the sale is deferred and recognized ratably over the term of the arrangement. Revenue is recognized immediately for the sale of software products that are utility products and that do not require product updates.
Revenue is recognized immediately for the sale of our one-time technical support service as it is performed when purchased. The Company recognizes a portion of the sale of one of its annual services at the time of purchase when all of the elements necessary for revenue recognition have occurred (i.e,. the initial technical support call has occurred) and the remaining revenue is deferred over the annual term. Revenue is deferred and recognized on a straight line basis over the term of the service agreements for the technical support services that are provided by third parties.
The Company also uses third parties to sell its software and therefore evaluates the criteria of FASB ASC Topic 605, “Revenue Recognition,” in determining whether it is appropriate to record the gross amount of revenue and related costs or the net amount earned as commissions. The Company is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, establishes product specifications, and has the risk of loss. Accordingly, the Company's revenue is recorded on a gross basis.
The Company still supports MyIdentityDefender Toolbar and CyberDefender FREE 2.0, which were free to subscribers. Revenues are earned from advertising networks which pay the Company to display advertisements inside the software or through the toolbar search. The Company recognizes revenue from the advertising networks monthly based on a rate determined either by the quantity of the ads displayed or the performance of the ads based on the amount of times the ads are clicked by the user. Furthermore, advertising revenue is recognized provided that no significant Company obligations remain at the end of a period and collection of the resulting receivable is probable. The Company’s obligations do not include guarantees of a minimum number of impressions.
Deferred Charges
The Company uses a third party to provide technical support services associated with the CyberDefenderULTIMATE product, which is no longer being sold but is still supported. The costs associated with this service are deferred and amortized against the recognition of the related sales revenue. Included in short-term and long-term deferred revenue as of September 30, 2011 is $430,000 and $59,000, respectively, related to the CyberDefenderULTIMATE product.
Advertising Costs
The Company expenses advertising costs as they are incurred. As described in detail in Note 4 below, the Company issued warrants for media and marketing services. The non-cash value of those warrants is included in media and marketing services – related party on the accompanying statements of operations.
Reserve for Refunds
The Company’s policy with respect to refunds is to offer refunds within the first 30 days after the date of purchase. The Company may voluntarily issue refunds to customers after 30 days of purchase, however the majority are issued within 30 days of the original sale and are charged against the associated sale or deferred revenues (as applicable). Refunds were $7.3 million and $4.7 million for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011 and December 31, 2010, the Company recorded a reserve for refunds of $0.3 million and $0, respectively.
Income Taxes
The Company has adopted the liability method of accounting for income taxes pursuant to FASB ASC Topic 740, “Income Taxes.” Deferred income taxes are recorded to reflect tax consequences on future years for the differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
FASB ASC Topic 740 prescribes recognition thresholds that must be met before a tax position is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. An entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold.
The Company does not have any unrecognized tax benefits as of September 30, 2011 and December 31, 2010 that, if recognized, would affect the Company’s effective income tax rate.
The Company’s policy is to recognize interest and penalties related to income tax issues as components of income tax expense. The Company did not recognize or have any accrual for interest and penalties relating to income taxes as of September 30, 2011.
Software Development Costs
The Company accounts for software development costs in accordance with FASB ASC Topic 985, “Software.” Such costs are expensed prior to achievement of technological feasibility and thereafter are capitalized. There have been very limited software development costs incurred between the time the software and its related enhancements have reached technological feasibility and its general release to customers. As a result, all software development costs have been charged to product development expense.
Fair Value Measurements
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company has no assets or liabilities that are measured at fair value on either a recurring or non-recurring basis.
All of our financial instruments are recorded at fair value. For certain of the Company’s financial instruments, including cash, restricted cash, accounts receivable, accounts payable, other accrued liabilities and notes payable, the carrying amounts approximate fair value due to their short maturities.
Loss Per Share
In accordance with FASB ASC Topic 260, “Earnings Per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2011 and 2010, there were 30,946,962 and 21,775,362 shares of potentially dilutive securities outstanding, respectively. As the Company reported a net loss, none of the potentially dilutive securities were included in the calculation of diluted earnings per share since their effect would be anti-dilutive for that reporting period.
Stock Based Compensation
The Company applies FASB ASC Topic 718, “Compensation – Stock Compensation,” which requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. For non-employee stock based compensation, the Company recognizes an expense in accordance with FASB ASC Topic 505, “Equity,” and values the equity securities based on the fair value of the security on the date of grant. For stock-based awards the value is based on the market value of the stock on the date of grant or the value of services, whichever is more readily available. Stock option awards are valued using the Black-Scholes option-pricing model.
The Company accounts for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the provisions of FASB ASC Topic 505, “Equity.” The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. An asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified for accounting purposes as an offset to equity on the grantor’s balance sheet once the equity instrument is granted. Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expense in its balance sheet.
Recently Issued Accounting Pronouncements
The Company has adopted all accounting pronouncements effective before September 30, 2011 which are applicable to the Company.
In September 2009, the FASB issued an update to its accounting guidance regarding multiple-deliverable revenue arrangements. The guidance addresses how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. This guidance is effective for annual periods beginning on or after September 15, 2010 but may be early adopted as of the beginning of an annual period. The Company adopted this guidance on January 1, 2011 and it did not have a material impact on its financial statements.
In October 2009, the FASB issued an update to its accounting guidance regarding software revenue recognition. The guidance changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the software revenue guidance in FASB ASC Topic 985, “Software.” In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after September 15, 2010 but may be early adopted. The Company adopted this guidance on January 1, 2011 and it did not have a material impact on its financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This update amends ASC Topic 820, “Fair Value Measurement and Disclosure.” ASU 2011-04 clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 is effective for annual and interim reporting periods beginning on or after December 15, 2011. The new guidance is to be adopted prospectively and early adoption is not permitted. We do not believe that adoption of ASU 2011-04 will have a material effect on the Company’s financial statements.
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SUBSEQUENT EVENTS | 9 Months Ended |
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Sep. 30, 2011 | |
Subsequent Events [Abstract] | |
Subsequent Events [Text Block] | NOTE 8 - SUBSEQUENT EVENTS
On October 18, 2011, the Company completed the private sale of an aggregate of $454,800 of the Company’s common stock at $0.6425 per share to six accredited investors pursuant to Securities Purchase Agreements. Each purchaser received a warrant to purchase one share of common stock for each two shares of common stock purchased at an exercise price of $0.8031. In connection with the sales, the Company paid a commission of $36,384 and issued a warrant to purchase 18,192 shares of common stock with an exercise price of $0.8031.
On October 7, 2011, the Board of Directors of the Company approved amendments to stock options agreements (“Agreements) issued to its directors, officers and certain employees and consultants to reduce the exercise price of the options to purchase the Company’s common stock that are subject to the Agreements. The exercise price will be reduced to $0.735, the market closing price on October 10, 2011. The Company will record expense of $235,237 in October related to the repricing.
On October 27, 2011, a purported class action complaint was filed by a former employee against the Company and TriNet Employer Group, Inc., which formerly handled payroll, benefits and certain human resources matters for the Company, in the Superior Court of the State of California for the County of Los Angeles.
The former employee, on behalf of herself and the members of the alleged class, has asserted claims based upon alleged: failure to pay statutorily mandated wages; failure to pay reporting time wages; failure to provide adequate meal and rest periods or proper compensation in lieu thereof; failure to furnish accurate itemized wage statements; failure to keep accurate payroll records; waiting time penalties; and unlawful unfair and fraudulent activity. The former employee seeks unspecified restitution, damages, penalties and other relief.
The Company believes the claim is without merit and intends to vigorously defend it.
On November 4, 2011, the Company completed the second of three tranches of the private sale of an aggregate of $3.0 million of the 10.5% Notes to an investor in the Company, pursuant to a Securities Purchase Agreement. See Note 5 above for a detailed description of the transaction. |
RELATED PARTY TRANSACTIONS | 9 Months Ended |
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Sep. 30, 2011 | |
Related Party Transactions [Abstract] | |
Related Party Transactions Disclosure [Text Block] | NOTE 7 - RELATED PARTY TRANSACTIONS
On March 24, 2009, the Company entered into a Media and Marketing Services Agreement, as amended, with GRM. The term of the agreement is until December 31, 2013 unless the agreement is terminated earlier in accordance with the terms and conditions thereof. Pursuant to the agreement, GRM will provide direct response media campaigns, including radio and television direct response commercials, to promote the Company’s products and services and will purchase media time on the Company’s behalf. As compensation for the services the Company issued warrants to GRM. See Note 5 for a detailed description of all warrants issued to GRM and the vesting of those warrants. The Media and Marketing Services Agreement was amended on October 15, 2010 to add a monthly creative management fee of $75,000 as all of the warrants issued to GRM had vested. An amendment to the agreement allowed $50,000 of the creative management fee to be waived per month by GRM during the four month period commencing on June 1, 2011 and expiring on September 30, 2011 if the Company remained in compliance with all of its obligations under the agreement. The Company paid GRM $60,000 and $510,000 in creative management fees for the three and nine months ended September 30, 2011.
Under the agreement, the Company will grant to GRM, as security for the Company’s prompt payment of all amounts due and performance of all obligations under the agreement, a security interest in substantially all of the Company’s assets.
In addition, GRM invoiced the Company $110,534 and $346,766 for the three and nine months ended September 30, 2011 for their overhead expense reimbursement on media costs incurred by GRM pursuant to the agreement. GRM invoiced the Company $122,433 and $301,932 for the three and nine months ended September 30, 2010.
On September 23, 2009, the Company appointed a representative of GRM to the Company’s board of directors pursuant to the Media and Marketing Services Agreement. On October 22, 2010, the Company and GRM entered into a Third Amendment to the Media and Marketing Services Agreement (“the Third Amendment”), effective as of October 15, 2010. Pursuant to the Third Amendment, GRM has the right to appoint one observer to the board of directors at any time when there is no GRM director on the board of directors. Effective October 25, 2010, the GRM representative to the Company’s board of directors resigned and GRM appointed an observer.
On April 1, 2010, the Company and GRM entered into a License Agreement (the “License Agreement”) whereby the Company granted to GRM an exclusive royalty-bearing license to market, sell and distribute, in the United States through retail channels of distribution (such as retail stores, online retail storefronts, kiosks, counters and other similar retail channels) and television shopping channels (such as QVC and Home Shopping Network), and in certain foreign countries through retail channels, television shopping channels, direct response television and radio, and Internet websites associated with such marketing channels (other than www.cyberdefender.com), the Company’s line of antivirus and Internet security products or services (the “License”).
In consideration of the license granted to GRM in the License Agreement, GRM will pay royalties to the Company on a product-by-product basis for each annual subscription and each annual renewal by end users of the products covered by the License Agreement. Upon the achievement of certain milestones or conditions in the License Agreement, GRM will make annual advances of royalties to the Company in the amount of $250,000 per year. If GRM fails to pay an annual advance when due, and if certain other conditions are met, the License shall become non-exclusive. The Company did not record any revenue under the License Agreement for the three or nine months ended September 30, 2011 and 2010.
The License Agreement provides that GRM and the Company will share costs associated with localizing products and related material to comport to the language, laws and/or customs of foreign countries, subject to certain caps on GRM’s expenses with respect to such localization efforts.
Under the License Agreement, the Company will provide customer service and all product and technical support services to end users of the products in the United States and will retain all revenue from such services. Additionally, with respect to each foreign country in which GRM markets the products, the Company will have the right to provide customer service
and all product and technical support services to end users of the products in such foreign country.
The License Agreement also provides that, after certain conditions are met, the Company has the right to buy back and terminate the License (and the related rights of GRM) as it relates to the territory of the United States (the “Domestic Buy-Out Right”) and/or to the collective territories outside of the United States (the “International Buy-Out Right”). The price to be paid by the Company in connection with the Domestic Buy-Out Right or International Buy-Out Right, as applicable, will be based on a combination of factors, including (i) the annualized gross revenue earned by GRM in connection with the sale and distribution of products in the applicable territory being “bought out” by the Company (the “Annualized Gross Revenue”), (ii) the enterprise value of the Company, (iii) the gross revenue of the Company for the 12 months preceding its exercise of such buy-out right and/or (iv) the fair market value of GRM’s rights under the License Agreement (with respect to the territory being “bought out” by the Company). In no case, however, will the buy-out price be less than (a) 1.5 times the Annualized Gross Revenue, if the applicable buy-out right is exercised within one year of such right becoming exercisable, or (b) 3.0 times the Annualized Gross Revenue, if the applicable buy-out right is exercised at any time after the one-year anniversary of such right becoming exercisable. The buy-out price will be payable in cash or in shares of the Company’s common stock, or any combination thereof, at GRM’s discretion.
The License Agreement may be terminated by mutual consent of the parties. The License Agreement may also be terminated by either party upon a default of the other party under the License Agreement that remains uncured for 30 days following notice of such default. Additionally, GRM may terminate the License Agreement at any time for convenience, provided that GRM may not market any antivirus or Internet security products or services that compete with the Company’s products or services in the distribution channels covered by the License Agreement for one year following such a termination for convenience. On October 22, 2010, the Company and GRM entered into a First Amendment to the License Agreement (“the First Amendment”), effective as of October 15, 2010. Pursuant to the First Amendment, the royalties payable in Schedule D to the License Agreement were amended and GRM was provided the one time right to cause the eighteen months cutoff date (to which reference is made in the definition of the International Roll-Out Date) to be delayed for a period of up to 12 months in the event that GRM elects to delay its marketing of the products in the International Territory for legitimate business reasons, including, without limitation, delays in the development of the required processes, systems or other aspects of GRM’s business.
See Note 5 for a detailed description of the GR Note and the 2011 GR Note. |
CONDENSED STATEMENTS OF CASH FLOWS (Supplemental disclosures) (USD $) | 9 Months Ended | |
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Sep. 30, 2011 | Sep. 30, 2010 | |
Supplemental disclosures of cash flow information: | ||
Income taxes paid | $ 800 | $ 800 |
Cash paid for interest | 20,299 | 121,501 |
Supplemental schedule of non-cash investing and financing activities: | ||
Beneficial conversion feature and shares issued accounted for as discount on notes payable | 3,645,191 | 908,571 |
Property and equipment acquired through capital lease obligations | 4,422 | 336,600 |
Conversion of notes payable and accrued interest to common stock | 0 | 2,313,139 |
Conversion of interest, fees and accounts payable to debt | 994,567 | 0 |
Contribution of shares of common stock from former CEO at par value | $ 2,000 | $ 0 |
RESTRICTED CASH | 9 Months Ended |
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Sep. 30, 2011 | |
Cash and Cash Equivalents [Abstract] | |
Cash and Cash Equivalents Disclosure [Text Block] | NOTE 3 – RESTRICTED CASH
Under a credit card processing agreement with a financial institution, the Company is required to maintain a security reserve deposit as collateral. The amount of the deposit was based on 10% of the six-month rolling sales volume and was approximately $2.8 million as December 31, 2010. The security reserve deposit was funded by the institution withholding a portion of daily cash receipts from Visa and MasterCard transactions. During February 2011, the Company negotiated the deposit amount down to $2.0 million. The amount of the deposit was $2.0 million as of September 30, 2011.
The Company was required to issue a $250,000 standby letter of credit to its landlord as a security deposit. The letter of credit is collateralized by cash held in an account at the Company’s bank. The account is interest bearing and the Company receives the interest that is earned.
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Stockholders Equity Note [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders' Equity Note Disclosure [Text Block] | NOTE 4 - STOCKHOLDERS’ DEFICIT
The Company entered into an agreement with Worth Linen Associates to provide consulting services related to marketing strategy and execution, call center operations and efficiencies, financial procedures and collections, and data systems and customer database management. The agreement is for a period of six months beginning June 1, 2011. As partial compensation for the agreement the Company has agreed to a grant of 419,048 registered shares of the Company’s common stock with a total value of $700,000. The number of shares was determined by dividing $700,000 by the average daily closing price of the Company’s common stock for the month of June, which was $1.67. The shares will vest in seven installments beginning on June 1, 2011 and ending on November 30, 2011. The Company recorded $107,157 and $301,715 to selling, general and administrative expense for the three and nine months ended September 30, 2011.
Stock warrants
On March 24, 2009, the Company entered into a Media and Marketing Services Agreement with GRM. Pursuant to the agreement, GRM will provide direct response media campaigns, including radio and television direct response commercials, to promote the Company’s products and services and will purchase media time on the Company’s behalf. During the term of the agreement, which is to continue until December 31, 2013, as amended, subject to certain rights of termination, GRM will be the exclusive provider of all media purchasing and direct response production services. GRM has the option to appoint a representative to the Company’s board of directors throughout the term of the agreement and for so long as GRM owns shares of the Company’s common stock or the right to purchase shares of the Company’s common stock which constitute at least 5% of the Company’s issued and outstanding common stock.
In consideration for the Media and Marketing Services Agreement and for creating, financing, producing, testing and evaluating a television commercial to market the Company’s products, the Company issued to GRM two five-year warrants each for the purchase of 1,000,000 shares of the Company’s common stock at a price of $1.25 per. One of the warrants may be exercised only for cash. The Company also issued to GRM a five-year warrant (“Media Services Warrant”) for the purchase of 8,000,000 shares of the Company’s common stock at an exercise price of $1.25 per share. The Media Services Warrant may be exercised only with cash and was subject to vesting as follows: for each $2 of media placement costs advanced by GRM on the Company’s behalf, the right to purchase one share of the Company’s common stock vested. As of September 30, 2011, all of the warrants had vested. During the three and nine months ended September 30, 2010, 2.4 million and 6.0 million warrants vested, and $6.4 million and $18.3 million was expensed to media and marketing services – related party expense.
On September 30, 2011, the Company and GRM entered into amendments of all three of GRM’s warrants, for the purchase of a total of 10,000,000 shares of the Company’s common stock. Each of the amendments resulted in a decrease in the exercise price of the warrants to $0.30 per share. The fair value of the modified instruments was determined using a Black-Scholes option-pricing model. The resulting incremental fair value of $974,613 was recorded as a charge to interest expense – related party.
During March and April 2011, the Company offered certain holders of warrants to purchase shares of the Company’s common stock a discount on their exercise price if they exercised their warrants for cash. The holders exercised warrants for the purchase of 615,293 shares of common stock at exercise prices from $0.75 to $0.94. The original exercise prices ranged from $1.00 to $1.25. The Company received proceeds of $484,163, net of fees of $25,482. The Company has recorded the incremental difference in the fair value of the original and modified instruments on the date of modification. The fair value of the modified instruments was determined using a Black-Scholes option-pricing model. The resulting incremental fair value of the warrants originally issued for services of $14,147 was recorded as a charge to selling, general and administrative expense. The resulting incremental fair value of $102,717 associated with all other warrants was recorded as a charge to loss on securities modifications.
The following represents a summary of the warrants outstanding at September 30, 2011 and 2010 and changes during the nine months then ended:
The weighted average grant date fair value of warrants granted during the three months ended September 30, 2011 and 2010 was $0.11 and $3.03 per share, respectively. The weighted average remaining life of the vested warrants is 2.3 years.
Stock options In January 2005, the Company adopted the CyberDefender Corporation 2005 Stock Option Plan (sometimes called the CyberDefender Corporation 2005 Equity Incentive Plan and referred to herein as the “2005 Plan”), which provides for the granting of Incentive Stock Options or Nonstatutory Stock Options, the issuance of stock appreciation rights, stock purchase rights and awards of stock. Under the terms of the 2005 Plan, the exercise price of options granted may be equal to, greater than or less than the fair market value on the date of grant, the options have a maximum term of ten years and generally vest over a period of service or attainment of specified performance objectives. The maximum aggregate amount of options that may be granted from the 2005 Plan is 931,734 shares, of which awards for the purchase of 563,233 shares have been granted and are outstanding, awards for the purchase of 238,125 shares have been exercised and awards for the purchase of 130,376 shares are available for grant at September 30, 2011.
On October 30, 2006, the Company adopted the Amended and Restated 2006 Equity Incentive Plan (“2006 Plan”) that provides for the granting of Incentive Stock Options or Nonstatutory Stock Options, the issuance of stock appreciation rights, stock purchase rights and awards of stock. Under the terms of the 2006 Plan, the exercise price of options granted may be equal to, greater than or less than the fair market value on the date of grant, the options may have a maximum term of ten years and generally vest over a period of service or attainment of specified performance objectives. The maximum aggregate amount of stock based awards that may be granted from the 2006 Plan is 2,875,000 shares, of which awards for the purchase of 2,130,389 shares have been granted and are outstanding, awards for the purchase of 333,191 shares have been exercised, awards of stocks totaling 286,944 shares have been awarded and awards for the purchase of 124,476 shares are available for grant at September 30, 2011.
A summary of stock option activity for the 2005 Plan and 2006 Plan is as follows:
The weighted-average grant date fair value of options granted during the nine months ended September 30, 2011 and 2010 was $0.70 and $2.50 per option, respectively.
As of September 30, 2011 and 2010, 654,329 and 1,065,950 of the options granted are not vested with an estimated remaining value of $765,447 and $1.8 million, respectively. At September 30, 2011 and 2010, the remaining value of non vested options granted is expected to be recognized over the weighted average vesting period of 2.45 and 2.61 years, respectively.
The Company recorded compensation expense associated with the issuance and vesting of stock options of approximately $463,000 and $913,000 in selling, general and administrative expense for the three and nine months ended September 30, 2011, respectively. The Company recorded compensation expense associated with the issuance and vesting of stock options of approximately $310,000 and $701,000 in selling, general and administrative expense for the three and nine months ended September 30, 2010, respectively.
During the nine months ended September 30, 2011 and 2010, 46,500 and 73,200 employee stock options were exercised for total proceeds to the Company of $6,928 and $62,000, respectively. The aggregate intrinsic value of the exercised options was approximately $116,000 and $242,000 for the nine months ended September 30, 2011 and 2010, respectively.
The Company recognizes the fair value of options issued to employees and consultants as stock-based compensation expense over the vesting period of the awards. The estimated fair value of options is based on the Black-Scholes pricing model. |
CONVERTIBLE NOTES PAYABLE | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Disclosure [Text Block] | NOTE 5 - CONVERTIBLE NOTES PAYABLE
On March 31, 2010, the Company issued in a private placement to GRM a 9% Secured Convertible Promissory Note in the aggregate principal amount of $5.3 million (the “GR Note”), due March 31, 2012. The Company received net proceeds of $5.0 million after payment of an issuance fee of $0.3 million to GRM. The Company recorded the issuance fee as a discount to the GR Note. The GR Note accrues simple interest at the rate of 9% per annum, payable on the first day of each calendar quarter in cash; provided, however, that GRM may elect to cause the accrued unpaid interest for any applicable quarter to be added to the then outstanding principal amount of the GR Note. GRM chose to have the interest payments due July 1, 2010, January 1, 2011, April 1, 2011 and July 1, 2011 added to the aggregate principal amount of the GR Note increasing the principal amount to $5,793,342 as of September 30, 2011. For the three and nine months ended September 30, 2011 the Company recorded $130,350 and $382,508 to interest expense – related party under the GR Note, respectively. For the three and nine months ended September 30, 2010 the Company recorded $121,933 and $241,183 to interest expense – related party under the GR Note.
The outstanding principal amount of the GR Note and accrued unpaid interest due thereon may be converted, at GRM’s election, into the Company’s common stock. The initial conversion price was $3.50 per share (the “Conversion Price”), subject to adjustment only in the event of stock splits, dividends, combinations, reclassifications and the like. The Company recorded a discount on the GR Note of $908,571 as a result of a beneficial conversion feature. Effective as of February 25, 2011, the Company and GRM entered into a second amendment to the GR Note to provide that the Conversion Price be reduced to $2.20. The Company remeasured the intrinsic value of the conversion feature embedded in the GR Note at the time of the reduction in the Conversion Price and determined that the fair value of the change was $877,824 which was added to the discount. The discount is being amortized over the term of the GR Note. The Company amortized $353,646 and $925,889 to interest expense – related party related to the GR Note for the three and nine months ended September 30, 2011. The Company amortized $151,071 and $302,142 to interest expense – related party related to the GR Note for the three and nine months ended September 30, 2010.
As part of the transaction, the Company incurred deferred financing costs of approximately $51,000. These costs are being amortized over the term of the GR Note. The Company recorded amortization of $6,377 and $19,131 to interest expense – related party during the three and nine months ended September 30, 2011, respectively. The Company recorded amortization of $6,377 and $12,754 to interest expense during the three and nine months ended September 30, 2010.
Effective as of February 25, 2011, the Company and GRM entered into a Loan Modification Agreement (the “Loan Modification Agreement”) pursuant to which the Company and GRM agreed to convert the existing indebtedness evidenced by a credit facility to indebtedness that is convertible into shares of the Company’s common stock. Pursuant to the Loan Modification Agreement, the Company and GRM agreed to amend and restate the credit facility on the terms and conditions of an Amended and Restated Nine Percent (9%) Secured Convertible Promissory Note made as of February 25, 2011, and due March 31, 2012 (the “2011 GR Note”).
The Company recorded interest expense of $386,651 for the 10% repayment fee on the credit facility for the nine months ended September 30, 2011. Interest on the aggregate unconverted and outstanding principal amount of the 2011 GR Note at the rate of 9% per annum is payable by the Company to GRM on the first day of each calendar quarter during the term. GRM chose to have the interest payments due July 1, 2011 added to the aggregate principal amount of the 2011 GR Note increasing the principal amount to $5,878,588 as of September 30, 2011. At any time, and until it is paid in full, the 2011 GR Note may be converted by GRM to shares of the Company’s common stock, in whole or in part and from time to time. The Conversion Price was adjusted to $1.86 as of March 31, 2011. As a result, the Company recorded a discount on the 2011 GR Note due to this beneficial conversion feature of $1.0 million. The Company amortized $252,857 and $505,714 to interest expense – related party related to the 2011 GR Note for the three and nine months ended September 30, 2011. For the three and nine months ended September 30, 2011 the Company recorded $132,268 and $387,362 to interest expense – related party under the 2011 GR Note, respectively.
On September 30, 2011, and
effective as of September 23, 2011, the Company and GRM entered into a Second Waiver and Forbearance Agreement (the “Agreement”). Pursuant to the Agreement, the Company, among other things: (i) acknowledged its failure to make interest payments payable on July 1, 2011 under the GR Note; (ii) acknowledged its failure to make interest payments payable on July 1, 2011 under the 2011 GR Note (together, the “ GR Notes”); and (iii) acknowledged certain other defaults in connection with the GR Notes.
Pursuant to the Agreement, GRM, among other things, agreed: (i) to capitalize the unpaid interest payments described above and payable on July 1, 2011 conditioned upon the Company’s payment of the interest payments due October 1, 2011 on the Notes; (ii) for a period of one hundred and twenty days through and including January 24, 2012, and for that period only, to waive its rights and remedies under the GR Notes and certain related documents and not to assert that the Company is in default of the GR Notes and related documents. Pursuant to the Agreement, GRM’s waiver and forbearance are conditioned upon the Company’s compliance with its obligations under the GR Notes and related documents, subject to certain exclusions. In the event of the Company’s default, GRM reserves the right to terminate the Agreement and pursue its rights and remedies with respect to any previously existing or subsequent default. In exchange for the Second Waiver and Forbearance the Company agreed to amend GRM’s warrants reducing the exercise price from $1.25 to $0.30.
On September 28, 2011, the Company completed the private sale of $2.2 million in aggregate principal amount of 9% Subordinated Convertible Promissory Notes (the “9% Notes”) to 33 accredited investors, including two independent directors of the Company, pursuant to Securities Purchase Agreements. With the exception of the 9% Notes sold to the independent directors, the 9% Notes are convertible, at the election of the holders, into shares of the Company’s common stock at a conversion price of $0.72 per share. The 9% Notes sold to the independent directors are convertible, at their election, into shares of the Company's common stock at a conversion price of $0.90 per share, unless our stockholders approve a conversion price of $0.72. The 9% Notes and accrued interest are due and payable thirteen months after the date of issuance, and are subordinate to certain senior debt owed by the Company to GRM.
In addition, each investor, with the exception of the Company's independent directors and the note resulting from the conversion of an account payable, will receive one incentive share of the Company’s common stock for each dollar invested. The independent directors will receive their pro rata portion of the incentive shares if approved by our stockholders. The incentive shares will be issued by the Company from its treasury following the transfer to the Company of shares owned by Gary Guseinov, the Company’s former chief executive officer and former chairman of the board of directors. The Company determined that the proceeds from the sale of the 9% Notes must be allocated between the 9% Notes and the incentive shares based on their relative fair values. The Company allocated $1,309,235 to the incentive shares based on the closing price of the Company’s common stock on the closing date of each tranche of the offering. This amount was recorded as a discount to the 9% Notes. The Company recorded an additional discount on the 9% Notes due to a beneficial conversion feature of $258,557. The Company amortized $219,586 to interest expense related to the discount on the 9% Notes for the three and nine months ended September 30, 2011.
On September 30, 2011, the Company completed the first of three tranches of a private sale of an aggregate of $3.0 million of 10.5% Subordinated Convertible Promissory Notes (the “10.5% Notes”) to an investor in the Company, pursuant to a Securities Purchase Agreement. The investor purchased the first 10.5% Note in the face amount of $1.0 million. Each of the three 10.5% Notes is convertible, at the investor’s election, into shares of the Company’s common stock at a conversion price of $0.30 per share. The second and third tranches of the sale are scheduled to close on October 31, 2011 and November 30, 2011, respectively. Each of the 10.5% Notes is due and payable thirteen months after the date of issuance and each is subordinate to certain senior debt owed by the Company to GRM. The investor received (and in the second and third tranches will receive) a warrant ("Warrant") to purchase one-half of one share of the Company’s common stock for each share of common stock he is entitled to receive upon conversion of a 10.5% Note. The Warrants are exercisable at $0.375 per share of common stock. The Company valued the Warrant using the Black-Scholes option-pricing model and recorded a discount to the 10.5% Note of $188,147.
During the terms of the 10.5% Notes purchased and to be purchased, the investor has the right, upon prior written notice to the Company, to cause the Company’s board of directors to appoint to the board: (a) him or one of his representatives acceptable to the Company; and (b) subject to the requirements of the Nasdaq Marketplace Rules or approval by the Company’s stockholders, one additional representative who at all times shall: (i) qualify as an “independent” director, as that term is defined in the Nasdaq Marketplace Rules and the
applicable rules of the Securities and Exchange Commission; (ii) be acceptable to the Company; and (iii) be subject to approval by GRM.
Convertible notes payable consist of the following:
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INTERIM FINANCIAL STATEMENTS | 9 Months Ended |
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Sep. 30, 2011 | |
Financial Statements [Abstract] | |
Interim Financial Statements [Text Block] | NOTE 1 - INTERIM FINANCIAL STATEMENTS
These unaudited interim financial statements have been prepared by CyberDefender Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations. These unaudited interim financial statements should be read in conjunction with the audited financial statements and footnotes for the Company for its year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K. The results for the nine-month interim period ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011. |