Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
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S-1/A — Pre-Effective Amendment to Registration Statement (General Form)
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,”“accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
Smaller
reporting company x
CALCULATION
OF REGISTRATION FEE
The total
number of shares of common stock (including shares of common stock underlying
warrants) registered is 32,800,000. The registration fee for 32,800,000 shares
was paid with the initial filing of the registration statement and prior
amendments.
This
Registration Statement shall also cover any additional shares of our common
stock which may become issuable by reason of any stock dividend, stock split,
recapitalization or other similar adjustments.
We hereby
amend this registration statement on such date or dates as may be necessary to
delay its effective date until we shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until this registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
Up
to 16,000,000 Shares of Common Stock together with 16,000,000 Common Stock
Purchase Warrants
And
Up
to 800,000 Shares of Common Stock Underlying Placement Agent
Warrants
This
prospectus relates to the offering of 16,000,000 shares of our common stock,
$0.001 par value (the “Shares”) accompanied by 16,000,000 common stock purchase
warrants (the “Warrants”) on a best efforts basis at a fixed price between $
0.07 and $0.30 cents per Share and an exercise price per Warrant equal to 150%
of the final offering Share price, and accordingly, we would receive gross
proceeds of up to $ 1,120,000, assuming sales at $ 0.07 per Share, or up to
$4,800,000, assuming sales at $0.30 per Share, in the event that we sell all
of these Shares. The shares of common stock underlying the
Warrants are being registered pursuant to the registration statement of which
this prospectus forms a part. In the event that we are only able to sell (a) 75%
or 12,000,000 of the offered Shares, we would receive gross proceeds of $
840,000 assuming sales at $ 0.07 per Share, or $3,600,000 assuming sales at
$0.30 per Share; (b) 50% or 8,000,000 of the offered Shares, we would receive
gross proceeds of $ 560,000 assuming sales at $ 0.07 per Share, or $2,400,000
assuming sales at $0.30 per Share; (c) 25% or 4,000,000 of the offered Shares,
we would receive gross proceeds of $ 280,000 assuming sales at $ 0.07 per Share,
or $1,200,000 assuming sales at $0.30 per Share; or (d) 10% or 1,600,000 of the
offered Shares, we would receive gross proceeds of $ 112,000 assuming sales at $
0.07, or $480,000 assuming sales at $0.30. Each Share is accompanied by one
Warrant to purchase one additional share of common stock. This prospectus also
relates to the registration of up to 800,000 shares of common stock underlying
Placement Agent Warrants described below. We will receive additional proceeds
from any exercise of the Warrants and the Placement Agent Warrants described
below.
There is
no minimum number of Shares and accompanying Warrants that must be sold in this
offering and, as a result, we may receive no proceeds or very minimal proceeds
from the sale of the Shares and accompanying Warrants. Proceeds that
we receive from the offering of Shares and accompanying Warrants will not be
placed into escrow.
Each
Warrant will entitle an investor to purchase one share of our common stock for
150% of the final offering Share price, commencing on the sixth month
anniversary of such investor's purchase of the Shares and accompanying Warrants
(the “Purchase”), and expiring on the three year anniversary of the
Purchase.
The
offering will commence promptly after the date of this prospectus and close no
later than 90 days after the date of this prospectus. However, we may
extend the offering, in our sole discretion and without notice, for up to
90 days following the expiration of the first 90-day offering
period. We will pay all expenses incurred in this
offering.
This
offering is a self-underwritten offering and there will be no underwriter
involved in the sale of the Shares and accompanying Warrants. We
intend to offer the Shares and accompanying Warrants through our officers and
directors who will not be paid any commission for such
sales. We have also retained Westminster, a division of Hudson
Securities Inc. (OTCBB: HDHL), as our placement agent (the “Placement Agent”) to
use their best efforts to solicit offers to purchase our Shares and accompanying
Warrants in this offering. The Placement Agent is not purchasing the Shares and
accompanying Warrants offered by us, and is not required to sell any specific
number or dollar amount of Shares and accompanying Warrants, but will assist us
in this offering on a “best efforts” basis.
Per Share and
Accompanying
Warrant
Total
Maximum
Offering Price 1
$
0.30
$
4,800,000
Placement
Agent’s Fees 1
$
0.024
$
384,000
Maximum
Offering Proceeds before expenses 1
$
0.30
$
4,800,000
1
The
Placement Agent will receive a 8% cash fee from the gross proceeds
received from the sale of the Shares and accompanying Warrants (subject to
certain limitations), warrants to purchase an aggregate of 5% of the total
Shares sold in this offering (the “Placement Agent Warrants”) and an
expense allowance of 2% of the proceeds of this offering, but in no event
more than $35,000. For more information related to our arrangement with
the Placement Agent, please see “Plan of Distribution” at page
10.
ii
Our
common stock is traded on the Over-the-Counter Bulletin Board under
the symbol “SCLD .OB ”. On March 11, 2010, the closing price of our
common stock was $0.10. There is no public market for our Warrants
and we have not applied for listing or quotation on any public market. We have
arbitrarily determined the exercise price per Warrant offered hereby. The
offering price bears no relationship to our assets, book value, earnings or any
other customary investment criteria.
Our
business is subject to many risks and an investment in our Shares and the
accompanying Warrants will also involve a high degree of risk. You should
carefully consider the factors described under the heading “risk factors”
beginning at page 4 before investing in the Shares and accompanying
Warrants.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is ___, 2010
iii
TABLE
OF CONTENTS
PAGE
GENERAL
1
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
1
PROSPECTUS
SUMMARY
1
RISK
FACTORS
4
USE
OF PROCEEDS
8
DETERMINATION
OF OFFERING PRICE
9
DILUTION
9
PLAN
OF DISTRIBUTION
10
DESCRIPTION
OF SECURITIES
12
INTERESTS
OF NAMED EXPERTS AND COUNSEL
14
BUSINESS
14
DESCRIPTION
OF PROPERTY
19
LEGAL
PROCEEDINGS
20
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
21
FINANCIAL
STATEMENTS
23
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
24
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
36
DIRECTORS
AND EXECUTIVE OFFICERS
36
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
38
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
39
EXECUTIVE
COMPENSATION
40
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
45
PROSPECTUS
46
INFORMATION
NOT REQUIRED IN PROSPECTUS
II-1
SIGNATURES
II-8
iv
GENERAL
As used
in this prospectus, references to “the Company,”“SteelCloud,”“we,”“our,”“ours” and “us” refer to SteelCloud, Inc. and its consolidated subsidiaries,
unless otherwise indicated. In addition, references to our “financial
statements” are to our consolidated financial statements except as the context
otherwise requires.
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
prospectus contains “forward-looking statements” and information relating to our
business that are based on our beliefs as well as assumptions made by us or
based upon information currently available to us. When used in this prospectus,
the words anticipate,” “believe,”“estimate,”“expect,”“intend,”“may,”“plan,”“project,”“should” and similar expressions are intended to identify
forward-looking statements. These forward-looking statements include, but are
not limited to, statements relating to our performance in “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”. These statements reflect our current views and assumptions with
respect to future events and are subject to risks and uncertainties. Actual and
future results and trends could differ materially from those set forth in such
statements due to various factors. Such factors include, among others: our
ability to obtain financing in the short term, general economic and business
conditions; industry capacity; industry trends; competition; changes in business
strategy or development plans; project performance; and availability of
qualified personnel. These forward-looking statements speak only as of the date
of this prospectus. Subject at all times to relevant securities law disclosure
requirements, we expressly disclaim any obligation or undertaking to disseminate
any update or revisions to any forward-looking statement contained herein to
reflect any change in our expectations with regard thereto or any changes in
events, conditions or circumstances on which any such statement is based. In
addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
PROSPECTUS
SUMMARY
WHERE
YOU CAN FIND US
Our
principal executive offices are located at 20110 Ashbrook Place, Suite 130,
Ashburn, Virginia20147. Our telephone number is (703) 674-5500, our
fax number is (703) 450-0407 and our website address is www.steelcloud.com.
The information on our website is not incorporated by reference into this
prospectus and should not be relied upon with respect to this
offering.
ABOUT
OUR BUSINESS
Founded
in 1987, we are a developer of mobility software solutions primarily for the
Research In Motion® (“RIM”) Blackberry market. We design and integrate our
software into specialized server appliances targeted at the Federal Government
and in particular the Department of Defense (“DoD”), public sector, commercial,
and remote hosting customers.
We were
originally incorporated as Dunn Computer Operating Company on July 27, 1987
under the laws of the Commonwealth of Virginia. On February 26, 1998,
Dunn Computer Corporation ("Dunn") was formed and incorporated in the
Commonwealth of Virginia to become a holding company for several entities
including Dunn Computer Operating Company. On May 15, 2001, our
shareholders approved an amendment to our Articles of Incorporation to change
our corporate name from Dunn Computer Corporation to SteelCloud,
Inc. On December 31, 2003, Dunn was merged with and into
SteelCloud.
1
THE
OFFERING
Securities
Offered
We
are offering up to 16,000,000 shares of our common stock, $0.001 par value
(the “Shares”) together with 16,000,000 common stock purchase warrants
(the “Warrants”) on a best efforts basis at a fixed price between $ 0.07
and $0.30 cents per Share and an exercise price per Warrant equal to 150%
of the final offering Share price, and accordingly, we would receive gross
proceeds of up to $ 1,120,000, assuming sales at $ 0.07 per Share, or up
to $4,800,000, assuming sales at $0.30 per Share, in the event that we
sell all of these Shares. In the event that we are only able to
sell (a) 75% or 12,000,000 of the offered Shares, we would receive gross
proceeds of $ 840,000 assuming sales at $ 0.07 per Share, or $3,600,000
assuming sales at $0.30 per Share; (b) 50% or 8,000,000 of the offered
Shares, we would receive gross proceeds of $ 560,000 assuming sales at
$0.07 per Share, or $2,400,000 assuming sales at $0.30 per Share; (c) 25%
or 4,000,000 of the offered Shares, we would receive gross proceeds of $
280,000 assuming sales at $ 0.07 per Share, or $1,200,000 assuming sales
at $0.30 per Share; or (d) 10% or 1,600,000 of the offered Shares, we
would receive gross proceeds of $ 112,000 assuming sales at $ 0.07, or
$480,000 assuming sales at $0.30 per share. Each Share is accompanied by
one Warrant to purchase one additional share of common stock.
There
is no minimum number of Shares that must be sold in this offering and, as
a result, we may receive no proceeds or very minimal proceeds from the
sale of the Shares and accompanying Warrants. Proceeds that we
receive from the offering of Shares and accompanying Warrants will not be
placed into escrow.
We
have retained Westminster, a division of Hudson Securities Inc. (OTCBB:
HDHL), as our placement agent (the “Placement Agent”) to use their best
efforts to solicit offers to purchase our Shares and accompanying Warrants
in this offering. The Placement Agent will receive a 8% cash fee from the
gross proceeds of the sale of the Shares and accompanying Warrants
(subject to certain limitations), Placement Agent Warrants to purchase 5%
of the total Shares sold in this offering, and an expense allowance of 2%
of the proceeds of this offering, but in no event more than $35,000. For
more information related to our arrangement with the Placement Agent,
please see “ Plan of
Distribution ” at page 10.
We
intend to use the net proceeds received from the sale of the Shares and
accompanying Warrants pursuant to this best efforts offering for general
working capital purposes.
Shares
Underlying Placement Agent Warrants
We
are also registering up to 800,000 shares of our common stock, $0.001 par
value, underlying the Placement Agent Warrants.
32,040,001
(assuming all Shares are sold but excluding shares of common stock
issuable upon exercise of the Warrants and the Placement Agent
Warrants).
Dividend
Policy
We
have not declared or paid any dividends on our common stock since our
inception, and we do not anticipate paying any such dividends for the
foreseeable future.
18,265,000
(assuming all (a) Shares and accompanying Warrants are sold, and (b)
800,000, representing the maximum amount of Placement Agent Warrants
issuable to the Placement Agents, are
issued).
2
Use
of Proceeds:
Proceeds
from this offering will be used for general working capital
purposes.
Over-the-Counter
Bulletin Board Symbol
Our
common stock is traded on the Over-the-Counter Bulletin Board under the
symbol “SCLD.OB”. Please see “Market for Registrant’s Common
Equity, Related Stockholder Matters ” at page
21.
Liquidity
and Capital Resources:
As
of March 11, 2010, we had approximately $35,000 cash on hand, which is
adequate for less than one month of operations. As such, we
rely on the cash generated from ongoing operations to fund our
operations. For the month of February 2010, we used
approximately $215,000 of cash while we generated approximately $202,000
from ongoing activities. For fiscal year 2010 through February28, 2010, we have used approximately $36,000 of cash. Because
we are not yet able to cover our operational expenses from our operational
revenues, we are reliant on external sources of liquidity in order to
continue our operations and properly execute our business
plan. We are exploring all available funding sources, including
a capital investment from an existing shareholder. Further, we
are engaged in discussions with other strategic partners to explore
alternative funding methods in the event that the offering being made
pursuant to this prospectus does not raise sufficient
funding.
Risk
Factors:
See
“Risk Factors ”
beginning at page 4 and the other information in this prospectus for
a discussion of the factors you should consider before deciding to invest
in shares of our common stock.
SUMMARY
FINANCIAL DATA
The
following summary financial information includes statement of expenses and
balance sheet data from our audited financial statements. The information
contained in this table should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operation ” and the financial
statements and accompanying footnotes included in this prospectus.
Our
financial situation creates substantial doubt as to whether we will be able to
continue as a going concern.
An
investment in our Shares and accompanying Warrants involves a high degree of
risk. You should carefully consider the risks described below and the other
information set forth in this prospectus before deciding to purchase the
securities offered in this best efforts offering. The risks described below are
not the only ones that we face . Additional risks not presently known to us or
that we currently consider immaterial may also adversely affect our business. If
any of the following risks actually occur , our business, financial condition
and operating results could be materially adversely affected. In this case, you
could lose all or part of your investment.
Risks
Related to our Securities
Our
common stock may be subject to substantial price and volume fluctuations due to
a number of factors, many of which are beyond our control, that may prevent our
stockholders from reselling our common stock at a profit.
The
securities markets have experienced significant price and volume fluctuations in
recent months and the market price of our common stock has been volatile. This
market volatility, as well as general economic, market or political conditions,
has, and could continue to, reduce the market price of our common stock. In
addition, our operating results could be below the expectations of public market
analysts and investors, and in response the market price of our common stock
could decrease significantly. Investors may be unable to resell their shares of
our common stock for a profit. The decline in the market price of our common
stock and market conditions generally may adversely affect our ability to raise
additional capital.
As
a “thinly-traded” stock, large sales can place downward pressure on our common
stock price.
Our
common stock, despite certain increases of trading volume from time to time, is
generally considered “thinly traded.” Financing transactions resulting in a
large number of newly issued shares that become readily tradable, or other
events that cause current stockholders to sell shares, could place downward
pressure on the trading price of our common stock. In addition, the lack of a
robust resale market may require a stockholder who desires to sell a large
number of shares to sell the shares in increments over time to mitigate any
adverse impact of the sales on the market price of our common
stock.
Because
we are now subject to “penny stock” rules, the level of trading activity in our
stock may be reduced.
Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by
penny stock rules adopted by the Securities and Exchange Commission (the “SEC”).
Penny stocks generally are equity securities with a price of less than $5.00
(other than securities registered on some national securities exchanges). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer’s presumed control over the market, and
monthly account statements showing the market value of each penny stock held in
the customer’s account. In addition, broker-dealers who sell these securities to
persons other than established customers and “accredited investors” must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written agreement to the transaction.
As a result of our delisting from the NASDAQ Capital Market, we are now subject
to these requirements, and the level of trading activity, if any, in the
secondary market for our common stock may be reduced as a result.
FINRA
sales practice requirements may limit a stockholder’s ability to buy and sell
our stock.
FINRA has
adopted rules that require that in recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, FINRA believes that there is a high probability that speculative
low priced securities will not be suitable for certain customers. FINRA
requirements will likely make it more difficult for broker-dealers to recommend
that their customers buy our common stock, which may have the effect of reducing
the level of trading activity in our common stock.
State
securities laws may limit secondary trading, which may restrict the states in
which you can sell the shares offered by this prospectus.
If you
purchase shares of our common stock sold pursuant to this offering, you may not
be able to resell the shares in a certain state unless and until the shares of
our common stock are qualified for secondary trading under the applicable
securities laws of such state or there is confirmation that an exemption, such
as listing in certain recognized securities manuals, is available for secondary
trading in such state. There can be no assurance that we will be successful in
registering or qualifying our common stock for secondary trading, or identifying
an available exemption for secondary trading in our common stock in every state.
If we fail to register or qualify, or to obtain or verify an exemption for the
secondary trading of our common stock in any particular state, the shares of
common stock could not be offered or sold to, or purchased by, a resident of
that state. In the event that a significant number of states refuse to permit
secondary trading in our common stock, the market for the common stock will be
limited which could drive down the market price of our common stock and reduce
the liquidity of the shares of our common stock. As a result, a
stockholder may be unable to resell shares of our common stock at all or at
current market prices, which could increase a stockholder’s risk of losing some
or all of his, her or its investment.
4
The
offering of the Shares and accompanying Warrants is a self-underwritten
offering.
This
offering of Shares and accompanying Warrants is a self-underwritten offering,
which means that we will offer the shares through our officers, directors and
the Placement Agent. This offering does not involve the participation of an
underwriter to market, distribute or sell the shares offered under this
prospectus. Although we have engaged a Placement Agent to use
their best efforts to solicit offers to purchase Shares and Warrants in this
offering, we can offer no assurance that our officers, directors or the
Placement Agent will be successful in selling all or any of the Shares and
accompanying Warrants offered hereby.
We
may issue more shares in connection with a merger or acquisition; this would
result in substantial dilution to you.
Any
merger or acquisition effected by us may result in the issuance of additional
securities without stockholder approval and may result in substantial dilution
in the percentage of our common stock held by our then existing stockholders.
Moreover, the common stock issued in any such merger or acquisition transaction
may be valued on an arbitrary or non-arm’s-length basis by our management,
resulting in an additional reduction in the percentage of common stock held by
our then existing stockholders. Our Board of Directors has the power to issue
any or all of such authorized but unissued shares without stockholder approval.
To the extent that additional shares of common stock or preferred stock are
issued in connection with a business transaction, combination or otherwise,
dilution to the interests of our stockholders will occur and the rights of our
stockholders may be materially adversely affected.
Fluctuations
in our quarterly operating results may cause the market price of our common
stock to fluctuate.
Our
operating results have in the past fluctuated from quarter to quarter and we
expect this trend to continue in the future. As a result, the market price of
our common stock could be volatile. In the past, following periods of volatility
in the market price of stock, many companies have been the object of securities
class action litigation. If we were to be sued in a securities class action, it
could result in substantial costs and a diversion of management's attention and
resources which could adversely affect our results of operations.
Our
Board of Directors has the power to designate a series of preferred stock
without shareholder approval that could contain conversion or voting rights that
adversely affect the voting power of holders of our common stock.
Our
Articles of Incorporation authorizes issuance of capital stock including
2,000,000 undesignated preferred shares, and empowers our Board of Directors to
prescribe by resolution and without shareholder approval a class or series of
undesignated shares, including the number of shares in the class or series and
the voting powers, designations, rights, preferences, restrictions and the
relative rights in each such class or series.
We have
not declared or paid any dividends on our common stock since our inception, and
we do not anticipate paying any such dividends for the foreseeable future.
Accordingly, holders of our common stock will have to rely on capital
appreciation, if any, to earn a return on their investment in our common
stock.
Our
auditors have expressed doubt regarding our ability to continue as a going
concern.
The
report of our independent registered public accounting firm on our consolidated
financial statements for the fiscal year ended October 31, 2009 contains an
explanatory paragraph regarding our ability to continue as a going concern based
upon our history of net losses. We have had recurring annual
operating losses since our fiscal year ended October 31, 2004. We
expect that such losses will continue at least until our fiscal year ending
October 31, 2010.
We
cannot offer assurances that any of the strategic options that we are
considering to improve our liquidity and obtain working capital will
occur or be successful.
We are
considering a variety of strategic options to improve our liquidity
and obtain working capital to fund our continuing business operations.
These options include equity offerings, asset sales, debt financing and merger
and acquisition transactions as alternatives to improve our cash
needs. However, there can be no assurance that we will be successful
in negotiating or concluding any of these transactions. If we are
unable to consummate one or more of these transactions, and adequate funds are
not available to us or are not available on acceptable terms, we will likely not
be able to continue as a going concern.
As
a result of our limited financial resources and staff, we have identified
material weaknesses in our internal control over financial reporting and
disclosure controls and procedures.
Under the
supervision of our Certifying Officers, we conducted an evaluation of the
effectiveness of our internal control over financial reporting and disclosure
controls and procedures as of October 31, 2009 using the criteria established in
“Internal Control—Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design and effectiveness of
controls, testing of the operating effectiveness of controls and a conclusion on
this evaluation. Based on this evaluation, and primarily due to our limited
financial resources and staff, our management concluded our internal control
over financial reporting and disclosure controls and procedures were not
effective as of October 31, 2009. As a result, there is a reasonable
possibility that a material misstatement of our annual or interim financial
statements would not have been prevented or detected on a timely
basis. Our new management, board of directors and audit committee are
currently evaluating remediation plans for this weakness.
We
may not be able to continue our operations without additional
funding.
As of
March 11, 2010, we had cash and cash equivalents of approximately $35,000 and a
working capital deficit. Management believes our current cash and cash
equivalents are sufficient to maintain our operations for less than 30 days from
March 11, 2010. We require between $1,500,000 and $2,000,000 in cash to continue
our operations for the next 12 months, which we may obtain through issuances of
debt and/or equity. Such financing may not be forthcoming. As widely
reported, the domestic financial markets have been extremely volatile in recent
months. If such conditions and constraints continue, we may not be
able to acquire additional funds either through credit markets or through equity
markets. Even if additional financing is available, it may not be available on
terms we find favorable. At this time, there are no anticipated sources of
additional financing in place. Failure to secure the needed additional financing
will have an adverse effect on our ability to remain in
business.
We
may not be able to compete successfully against current and future
competitors.
The
market for our products and services is highly competitive. Many of our
competitors offer broader product lines and have substantially greater
financial, technical, marketing and other resources than we do, which could
seriously harm our net sales and results of operation. Additionally, our
competitors may receive beneficial prices from purchasing component parts in
large quantities and may be parties to product and process technology license
arrangements that are more favorable in terms of pricing and availability than
our arrangements. As a result, we may have difficulty increasing our market
share.
6
Our
new business model relies heavily on the success of BlackBerry products and
services.
We
developed SteelWorks® Mobile and SteelWorks FedMobile in conjunction with
Research in Motion (“RIM”) as a solution specifically designed for the
BlackBerry Enterprise Server (“BES”). SteelWorks® Mobile and
SteelWorks FedMobile is an integrated server appliance that enables virtually
any size organization to implement BES. Our new business model, and
the success of SteelWorks® Mobile and SteelWorks FedMobile, relies heavily on
the success of BlackBerry products and services and any changes in the
technology or the market demand for Blackberry products and services could
negatively impact our business.
If
we are unable to attract, assimilate and retain highly skilled technical
personnel, our business could be seriously harmed.
Our
future success is largely dependent upon our ability to identify, attract, hire,
train, retain and motivate highly skilled technical
personnel. Competition in this market is intense, and we cannot be
certain that we will be able to attract, assimilate or retain sufficiently
qualified personnel. Our inability to do so could have a material adverse effect
on our business, results of operations and financial condition.
7
USE
OF PROCEEDS
The net
proceeds to us from the sale of up to 16,000,000 Shares and accompanying
Warrants to purchase an additional 16,000,000 shares of our common stock,
offered at a fixed public offering price between $ 0.07 and $0.30 per Share,
will vary depending upon the total number of Shares actually sold. There is no
minimum number of Shares and accompanying Warrants that must be sold in this
offering and, as a result, we may receive no proceeds or very minimal proceeds
from the sale of the Shares and accompanying Warrants. Proceeds that we receive
from the offering of Shares and accompanying Warrants will not be placed into
escrow. Regardless of the number of Shares and accompanying Warrants sold, we
expect to incur offering expenses estimated at approximately $57,000 for legal,
accounting, SEC EDGAR filing, printing, and transfer agent fees in connection
with this offering. Additionally, we will incur Placement Agent fees of 8% of
the gross proceeds of the sale of the Shares and accompanying
Warrants.
The table
below sets forth the net proceeds to us from this offering in the event that we
sell 16,000,000, 12,000,000, 8,000,000, 4,000,000 or 1,600,000 Shares at the
minimum offering price of $ 0.07 and the maximum offering price of
$0.30. This table does not set forth (a) the proceeds we will receive
from the exercise of Warrants or Placement Agent Warrants, or (b) all
possibilities. The Placement Agent fees set forth below assume that the
Placement Agent has sold the total number of Shares set forth in bold.
There is no guarantee that we will be successful at selling any of the
securities being offered in this prospectus. Accordingly, the actual amount of
proceeds we will raise in this offering, if any, may differ.
$
0.07 per
Share
$0.30 per
Share
16,000,000
(100%) Shares Sold
Gross
Proceeds
$
1,120,000
$
4,800,000
Less
Offering Expenses
$
57,000
$
57,000
Less
Placement Agent Fee
$
89,600
$
384,000
Net
Offering Proceeds
$
973,400
$
4,359,000
12,000,000
(75%) Shares Sold
Gross
Proceeds
$
840,000
$
3,600,000
Less
Offering Expenses
$
57,000
$
57,000
Less
Placement Agent Fee
$
67,200
$
288,000
Net
Offering Proceeds
$
715,800
$
3,255,000
8,000,000
(50%) Shares Sold
Gross
Proceeds
$
560,000
$
2,400,000
Less
Offering Expenses
$
57,000
$
57,000
Less
Placement Agent Fee
$
44,800
$
192,000
Net
Offering Proceeds
$
458,200
$
2,151,000
4,000,000
(25%) Shares Sold
Gross
Proceeds
$
280,000
$
1,200,000
Less
Offering Expenses
$
57,000
$
57,000
Less
Placement Agent Fee
$
22,400
$
96,000
Net
Offering Proceeds
$
200,600
$
1,047,000
1,600,000
(10%) Shares Sold
Gross
Proceeds
$
112,000
$
480,000
Less
Offering Expenses
$
57,000
$
57,000
Less
Placement Agent Fee
$
8,960
$
38,400
Net
Offering Proceeds
$
46,040
$
384,600
8
Our
officers and directors will not receive any compensation for their efforts in
selling our Shares and the accompanying Warrants.
The net
proceeds from this offering will be used for general working capital during the
twelve months following the completion of this offering. In all instances, after
the effectiveness of the registration statement of which this prospectus forms a
part, we will need some amount of working capital to maintain our general
existence and comply with our public reporting obligations. In addition to
changing allocations because of the amount of proceeds received, we may change
the use of proceeds because of changes in our business plan. Investors should
understand that we have wide discretion over the use of proceeds.
DETERMINATION
OF OFFERING PRICE
The
determination of the offering price for the Shares and the exercise price of the
accompanying Warrants (and the Placement Agent Warrants) has been arbitrarily
determined and does not necessarily relate to our asset value, net worth, or
other established criteria of value, and may not be indicative of prices that
will prevail in the trading market.
DILUTION
Purchasers
of our Shares will experience an immediate dilution of net tangible book value
per share of our common stock. Our net tangible book value as of March 11, 2010
was approximately ($673,227) or ($0.04) per share of our common stock (based
upon 16,040,001 shares of our common stock outstanding). Net tangible book value
per share is equal to our total net tangible book value, which is our total
tangible assets less our total liabilities, divided by the number of shares of
our outstanding common stock. Dilution per share equals the difference between
the amount per share paid by purchasers of Shares and accompanying Warrants in
this offering and the net tangible book value per share of our common stock
immediately after this offering.
The
following table illustrates an offering based on $0.19 per Share, which is the
price between the minimum offering price of $ 0.07 per Share and the
maximum offering price of $0.30 per Share, and after deducting approximately
$57,000 of offering expenses together with the 8% Placement Agent fee payable by
us.
9
Assuming
100% or
16,000,000
Shares Sold
75% or
12,000,000
Shares Sold
50% or
8,000,000
Shares Sold
25% or
4,000,000
Shares Sold
10% or
1,600,000
Shares Sold
Subscription
price per Share
$
0.19
0.19
0.19
0.19
0.19
Net
tangible book value per Share prior to the offering
(0.04)
(0.04)
(0.04
)
(0.04)
(0.04)
Increase
per Share attributable to the offering
0.11
0.09
0.07
0.04
0.02
Pro
forma net tangible book value per Share after the offering
0.06
0.05
0.03
0.00
(0.03)
Dilution
in net tangible book value per Share to purchasers
$
0.13
0.14
0.16
0.19
0.22
PLAN
OF DISTRIBUTION
We intend
to sell our Shares and accompanying Warrants during the 90-day period following
the date of this prospectus at a fixed price between $0.07 and $0.30 per Share
and at an exercise price of $0.11 and $0.45 per Warrant share. We
intend to hold one or more closings in connection with this offering. For each
Share purchased the buyer will receive one Warrant. There is no
minimum number of Shares and accompanying Warrants that must be sold in this
offering and, as a result, we may receive no proceeds or very minimal proceeds
from the sale of the Shares. Proceeds that we receive from the
offering of Shares and accompanying Warrants will not be placed into
escrow. We may extend this offering for up to 90 days following the
expiration of the first 90-day offering period.
We have
retained Westminster, a division of Hudson Securities Inc., as our Placement
Agent to use their best efforts to solicit offers from selected investors to
purchase our Shares and underlying Warrants in this offering. The Placement
Agent is not obligated to, and has advised us that they will not, purchase any
Shares or Warrants for their own account.
The
compensation of the Placement Agent in connection with serving as our placement
agent for this offering will consist of the Placement Fee and reimbursement of
expenses, as described below. We will pay the Placement Agent a cash commission
fee of 8% from the gross proceeds of this offering (the “Placement Agent Fee”);
however, the Placement Agent shall not receive the Placement Agent Fee for
(i) investments made by Caledonia Capital Corporation (an entity to which we
have issued a promissory note) and our executive officers and directors, and
(ii) investments made by investors introduced by our executive officers or
directors prior to receipt by the Placement Agent of a no-objection letter from
FINRA relating to the Placement Agent’s compensation and services described
herein. Additionally, we will issue to the Placement Agent Placement Agent
Warrants (the Placement Agent Warrants together with the Placement Agent Fee,
the “Fee”) to purchase 5% of the total Shares sold in this offering but
excluding all common stock issued and issuable (i) to Caledonia Capital
Corporation and our executive officers and directors in this offering, and (ii)
for investments made by investors introduced to us by our executive officers or
directors prior to receipt by the Placement Agent of a no-objection letter from
FINRA relating to the Placement Agent’s compensation and services described
herein. The Placement Agent Warrants shall be exercisable at 125% of the final
offering Share price and shall have a term of exercise expiring no later than
five years from the effective date of the registration statement of which this
prospectus forms a part.
The
Placement Agent Warrants shall not have anti-dilution protections or be
transferable for six months from the date of the final closing of this offering
except as permitted by Financial Industry Regulatory Authority (“FINRA”) Rule
5110, in that such Placement Agent Warrants may be transferred during the
restriction period: (i) by operation of law or by reason of our
reorganization; (ii) to any FINRA member firm participating in the offering and
the officers or partners thereof, if all securities so transferred remain
subject to the lock-up restriction set forth in Rule 5110 for the remainder of
the time period; (iii) if the aggregate amount of our securities held
by the holder of the Placement Agent Warrants or related person do not exceed 1%
of the securities being offered; (iv) to the extent of a transfer of a security
that is beneficially owned on a pro-rata basis by all equity owners of an
investment fund, provided that no participating member manages or otherwise
directs investments by the fund, and participating members in the aggregate do
not own more than 10% of the equity in the fund; or (v) in connection
with the exercise or conversion of any security, if all securities received
remain subject to the six month lock-up restriction for the remainder of the
time period.
We have
agreed to reimburse the Placement Agent, subject to compliance with FINRA Rule
5110(f)(2)(D), for its accountable fees, disbursements and expenses (with
supporting invoices/receipts) up to a maximum of 2% of the aggregate gross
proceeds raised in the Financing (excluding (i) investments made by Caledonia
Capital and our executive officers and directors, and (ii) investments made by
investors introduced by our executive officers or directors prior to receipt by
the Placement Agent of a no-objection letter from FINRA relating to the
Placement Agent’s compensation and services described herein) but in no event
more than $35,000. We have agreed to pay an advance of $20,000 for such
expenses, which amount shall be non-refundable to the extent Westminster
provides us with supporting invoices or receipts of actual expenses
incurred.
10
Furthermore,
we have agreed to indemnify the Placement Agent and its controlling persons from
and against, and to make contributions for payments made by such person ’ s with
respect to, certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended (the “Securities Act”). The Placement Agent
may be deemed an “underwriter” within the meaning of the Securities
Act.
The
Shares and accompanying Warrants will also be sold by our executive officers and
directors. We are relying upon Rule 3a4-1 of the General Rules and Regulations
promulgated under the Securities Act (“Rule 3a4-1”), to not deem our executive
officers and directors as brokers. None of our executive officers or directors
are registered broker-dealers or affiliates of broker-dealers, and to the extent
that our executive officers and directors sell Shares and accompanying Warrants,
no commissions or other remuneration based either directly or indirectly on
transactions in securities will be paid to such persons. In addition, our
executive officers and directors will conduct their selling activity in
accordance with paragraphs (a)(4)(ii) of Rule 3a4-1, in that each person
primarily performs substantial duties for us other than in connection with
transactions in securities, each person is not a broker or dealer or affiliated
with a broker or dealer in the last twelve months and each person does not
participate in selling an offering of securities more than once every twelve
months other than as permitted under Rule 3a4-1
11
DESCRIPTION
OF SECURITIES
Common
Stock
In this
offering, we are offering up to 16,000,000 Shares of our common stock at a fixed
price between $0.07 and $0.30 per share, accompanied by Warrants to purchase up
to an additional 16,000,000 shares of our common stock. Each Warrant has an
exercise price of 150% of the final offering price of the Shares, has a term of
three years, and is exercisable on or after the six month anniversary from the
purchase date until on or before the three year anniversary of the purchase
date. Each Share is accompanied by one Warrant to purchase one additional share
of our common stock. The shares of common stock underlying the Warrants are
being registered pursuant to the registration statement of which this prospectus
forms a part.
The
Shares will be sold during the 90-day period following the date of this
prospectus, which period may be extended in our sole discretion and without
notice for an additional 90 days.
We are
also registering up to 800,000 shares of our common stock underlying the
Placement Agent Warrants.
On
March 11, 2010, 16,040,001 shares of our common stock were
outstanding.
Warrants
Each
Share will be accompanied by one Warrant to purchase one additional share of our
common stock. The exercise price per Warrant share will be equal to
150% of the final offering Share price. The Shares underlying the
Warrants will have such rights and preferences which are attributable to all the
shares of our common stock, $0.001 par value. The Shares of common stock
underlying the Warrants are being registered; however, the Warrants are not
being registered and there will be no market for the Warrants.
Exercise.
Holders of the Warrants may exercise their Warrants to purchase shares of our
common stock on or before the expiration date by delivering (i) an exercise
notice, appropriately completed and duly signed, and (ii) payment of the
exercise price for the number of shares with respect to which the Warrant is
being exercised. Warrants may be exercised in whole or in part, but only for
full shares of common stock, and any portion of a Warrant not exercised prior to
the expiration date shall be and become void and of no value.
The
shares of common stock issuable on exercise of the Warrants will be, when issued
in accordance with the Warrants, duly and validly authorized, issued and fully
paid and non-assessable. We will authorize and reserve at least that number of
shares of common stock equal to the number of shares of common stock issuable
upon exercise of all outstanding Warrants.
Delivery
of Certificates . Upon the holder’s exercise of a Warrant, we will
promptly, but in no event later than five business days after the exercise date,
issue and deliver, or cause to be issued and delivered, a certificate for the
shares of common stock issuable upon exercise of the Warrant, free of
restrictive legends (provided such shares are covered by an effective
registration statement at the time of exercise).
Other
Adjustments . The exercise price and the number of shares of common stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of specific events, including stock dividends, stock splits, and
combinations of our common stock. If we make or issue a dividend or other
distribution payable in securities other than shares of common stock, or in cash
or other property, then each holder’s Warrant will become the right to receive,
upon exercise of such warrant, in addition to the number of shares of common
stock issuable under the Warrant, the same kind and amount of securities, cash
or other property as such holder would have been entitled to receive upon the
occurrence of such transaction, if the Warrant had been exercised immediately
prior to such transaction.
The
exercise price per Placement Agent Warrant shall be 125% of the final offering
Share price. The Placement Agent Warrants shall not have anti-dilution
protection or be transferable for six months from the final closing of this
offering, except as otherwise permitted by FINRA Rule 5110. The shares of common
stock underlying the Placement Agent Warrants are being registered; however, the
Placement Agent Warrants are not being registered and there will be no market
for the Placement Agent Warrants.
Exercise
.. The Placement Agent may exercise the Placement Agent Warrants
to purchase shares of our common stock for five years from the effective date of
the registration statement of which this prospectus forms a part. The Placement
Agent Warrants may be exercised in whole or in part, but only for full shares of
common stock, and any portion of a Placement Agent Warrant not exercised prior
to the expiration date shall be and become void and of no value.
The
shares of common stock issuable on exercise of the Placement Agent Warrants will
be, when issued in accordance with the Placement Agent Warrants, duly and
validly authorized, issued and fully paid and non-assessable. We will authorize
and reserve at least that number of shares of common stock equal to the number
of shares of common stock issuable upon exercise of the outstanding Placement
Agent Warrants.
Further,
for a period of six months after the issuance date of the Placement Agent
Warrants (which shall not be earlier than the closing date of this offering
pursuant to which the Placement Agent Warrants are being issued), neither the
Placement Agent Warrants nor any shares underlying the Placement Agent Warrants
issued upon exercise of the Placement Agent Warrants shall be sold, transferred,
assigned, pledged, or hypothecated, or be the subject of any hedging, short
sale, derivative, put, or call transaction that would result in the effective
economic disposition of the securities by any person for a period of 180 days
immediately following the date of effectiveness or commencement of sales of this
offering pursuant to which the Placement Agent Warrants are being issued, except
the transfer of any security:
(i) by
operation of law or by reason of our reorganization;
(ii) to
any FINRA member firm participating in the offering and the officers or partners
thereof, if all securities so transferred remain subject to the six month
lock-up restriction for the remainder of the time period;
(iii) if
the aggregate amount of our securities held by the Placement Agent or related
person do not exceed 1% of the securities being offered in this
offering;
(iv) that
is beneficially owned on a pro-rata basis by all equity owners of an investment
fund, provided that no participating member manages or otherwise directs
investments by the fund, and participating members in the aggregate do not own
more than 10% of the equity in the fund; or
(v) the
exercise or conversion of any security, if all securities received remain
subject to the six month lock-up restriction for the remainder of the time
period.
Delivery
of Certificates . Upon the Placement Agent’s exercise of a Placement
Agent Warrant, we will promptly, but in no event later than five business days
after the exercise date, issue and deliver, or cause to be issued and delivered,
a certificate for the shares of common stock issuable upon exercise of the
Placement Agent Warrant, free of restrictive legends (provided that such shares
are covered by an effective registration statement at the time of
exercise).
Other
Adjustments . Subject to FINRA Rule 5110, the exercise price and the
number of shares of common stock purchasable upon the exercise of the Placement
Agent Warrants are subject to adjustment upon the occurrence of specific events,
including stock dividends, stock splits, and combinations of our common stock.
If we make or issue a dividend or other distribution payable in securities other
than shares of common stock, or in cash or other property, then each Placement
Agent Warrant will become the right to receive, upon exercise of such Placement
Agent Warrant, in addition to the number of shares of common stock issuable
under the Placement Agent Warrant, the same kind and amount of securities, cash
or other property as it would have been entitled to receive upon the occurrence
of such transaction, if the Placement Agent Warrant had been exercised
immediately prior to such transaction.
Additional
Provisions. We are not required to issue fractional shares upon the
exercise of the Placement Agent Warrants. The Placement Agent will not possess
any rights under the Placement Agent Warrants as a shareholder under those
Placement Agent Warrants until the Placement Agent exercises the Placement Agent
Warrants. The above
summary of certain terms and provisions of the Placement Agent Warrants is
qualified in its entirety by reference to the detailed provisions of the
Placement Agent Warrants, the form of which has been filed as Exhibit 4.3.2 to
the registration statement of which this prospectus forms a part .
13
INTERESTS
OF NAMED EXPERTS AND COUNSEL
The
financial statements as of October 31, 2009 and 2008 included in this
prospectus, and in the registration statement of which this prospectus forms a
part, have been audited by Grant Thornton LLP, an independent registered public
accounting firm, to the extent and for the period set forth in their report
appearing elsewhere herein and in the registration statement, and are included
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
The
validity of the issuance of the common stock offered hereby will be passed upon
for us by Gersten Savage LLP, 600 Lexington Avenue, New York, New York10022,
included in the opinion letter filed as an exhibit to the registration statement
of which this prospectus forms a part. Jay M. Kaplowitz, a partner of Gersten
Savage LLP, serves as our director.
No expert
or counsel named in this prospectus as having prepared or certified any part of
this prospectus or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis or had, or
is to receive, in connection with the offering, a substantial interest, directly
or indirectly, in our Company, nor was any such expert connected with us as a
promoter, managing or principal underwriter, voting trustee, director, officer
or employee.
BUSINESS
OVERVIEW
Founded
in 1987, we are a developer of mobility appliance software solutions primarily
for the Research In Motion® ( “ RIM ” ) BlackBerry market. We design
and integrate our software into specialized server appliances targeted at
Department of Defense (“DoD”), public sector, commercial, and remote hosting
customers. Until July 2009, we offered computer integration
solutions for the federal marketplace and Independent Software
Vendors. In July 2009, we entered into an Asset Purchase Agreement
with NCS Technologies, Inc., a Virginia corporation (“NCS”), pursuant to which
we agreed to sell to NCS, and NCS agreed to purchase from us, all of our right,
title and interest in and to the assets relating to our computer integration
business. Further, in July 2009 our management and Board of
Directors determined to shift the focus of our operations, resources and
investments to our BlackBerry-related technologies and products.
We were
originally incorporated as Dunn Computer Operating Company on July 27, 1987
under the laws of the Commonwealth of Virginia. On February 26, 1998,
Dunn Computer Corporation ("Dunn") was formed and incorporated in the
Commonwealth of Virginia to become a holding company for several entities
including Dunn Computer Operating Company. Our subsidiary is
International Data Products ("IDP"), which we acquired in May
1998. On May 15, 2001, our shareholders approved an amendment to our
Articles of Incorporation to change our corporate name from Dunn Computer
Corporation to SteelCloud, Inc. On December 31, 2003, Dunn was merged
with and into SteelCloud. On February 17, 2004, we acquired the
assets of Asgard Holding, LLC ("Asgard"). In July 2006, as part of
our restructuring efforts, we closed our sales office and ceased all of our
operations in Florida. Our former subsidiaries, Puerto Rico
Industrial Manufacturing Operations Acquisition Corporation (“PRIMO”), and STMS
Corporation (“STMS”), are currently inactive.
RECENT
DEVELOPMENTS
January
2010 Sale of Certain Professional Services Assets
On
January 11, 2010, we entered into a Purchase and Sale Agreement (the
“Agreement”) with Global Technology Partners, Inc., a Maryland Corporation (the
“Purchaser”). Pursuant to the Agreement we sold to the Purchaser a
large portion of our professional services assets, consisting of certain
consulting contracts and related agreements, and assigned all of our rights to
employment and independent contractor contracts for certain of our contractors
and employees engaged in the consulting business (the “Assets”). As
consideration for the sale of the Assets, the Purchaser agreed to pay a base
price of one hundred forty thousand dollars ($140,000) (the “Base
Price”). In addition to the Base Price, the Agreement provides
for contingent payments in the amount of (a) one hundred thousand dollars
($100,000) in the event certain payments are made pursuant to certain of the
Assets, and (b) twenty percent (20%) of the gross margin from all revenue
generated from the Assets for the period beginning from January 11, 2010 and
ending on January 11, 2011. Pursuant to the Agreement, the parties
agreed to cooperate in obtaining novations of all governmental contracts
included in the Assets. We agreed to guarantee payment of all
liabilities and the performance of all obligations that Purchaser assumed under
any governmental contracts included in the Assets. The Agreement
contains standard representations and warranties for a transaction of this type.
The terms of the transaction were the result of arm’s length negotiations
between the Purchaser and us. Prior to the completion of the
transaction, neither we nor any of our affiliates or officers, directors or
their associates had any material relationship with the Purchaser, other than in
respect of the Agreement and the transactions contemplated therein and related
thereto.
14
November
2009 Line of Credit and Note Payable
On
November 3, 2009, we entered into a Line of Credit and Security Agreement (the
“Credit and Security Agreement”) with Caledonia Capital Corporation, a Delaware
corporation (the “Lender”) pursuant to which the Lender agreed to extend to us a
revolving line of credit in the amount of $150,000, in the form of a Revolving
Line of Credit Promissory Note (the “Credit Note”). The Credit Note
bears interest at a rate of 15% per annum, and is payable in monthly
installments commencing 30 days after November 3, 2009, which was the date when
we issued the Credit Note. The principal amount of the Credit Note,
together with interest accrued and unpaid thereon and all other sums due, shall
be due and payable in full upon the earlier to occur of (a) March 31, 2010, or
(b) the date we shall have raised a total of not less than $1,000,000 in capital
invested in our equity which is accompanied by our issuing shares of stock which
were not trading in the public markets prior to the date of the Credit Note
(“New Equity Capital”). There are no penalties for early
prepayment of the Credit Note.
The
Credit Note is a revolving line of credit note. Principal advances
may be made, from time to time, by the Lender up to the principal amount of the
Credit Note, and principal payments may be made, from time to time by us to
reduce the principal balance owing pursuant to the Credit Note.
Our
obligations under the Credit and Security Agreement and the Credit Note are
secured by a lien in and to all of our rights, title and interest in and to our
furniture, fixtures, equipment, supplies, receivables, intangibles, and
inventory, together with all present and future substitutions, replacements and
accessories thereto and all present and future proceeds and products thereof, in
any form whatsoever (the “Collateral”).
Pursuant
to the Credit and Security Agreement, in the event that (a) we fail to pay when
due any principal, interest or other sum owing on any of the obligations
described in the Credit and Security Agreement when due; (b) we fail to perform
any other covenant or agreement in the Agreement, in the Warrant or in any of
the other loan documents and such default continues uncorrected for a period of
thirty (30) days after written notice of such default from the Lender to us; (c)
if any warranty or representation that we made to the Lender shall be untrue or
misleading in any material respect; (d) if a trustee or receiver is appointed
for us or for all or a substantial part of our assets; or if we make a general
assignment for the benefit of creditors; or if we file for bankruptcy; or if an
involuntary bankruptcy petition is filed against us and such petition is not
dismissed within forty-five (45) days after the filing of the same; (e) if any
property that we pledged or hypothecated to Lender, or any deposit account held
by Lender, is levied upon or attached or further encumbered, or garnished or the
Collateral shall otherwise be impaired and same is not removed within thirty
(30) days after written notice thereof from Lender us, as determined by Lender;
(f) if there occurs any material adverse change in our financial condition or
value of the Collateral, as determined by Lender; (g) if a final judgment is
entered against us, and the same is not discharged, appealed (provided such
appeal stays such judgment) or satisfied within thirty (30) calendar days; (h)
if we are liquidated or dissolved; or (i) a default shall occur under that
certain Note in the original principal amount of $250,000 from us to the Lender
dated July 1, 2009, then the
Lender may , without any further notice or demand, (1) declare any or all
of the obligations not already due to be immediately due and payable; (2)
enforce, by any proceedings or otherwise, any of the obligations; (3) take
exclusive possession of any or all of the Collateral, (4) enforce any liens or
security interests securing the obligations; (5) demand, compromise, collect,
sue for and receive any money or property at any time due, (6) endorse our name
on any promissory notes or other instruments, checks, drafts, money orders or
other items of payment constituting Collateral, or collections or other proceeds
of Collateral, that may come into Lender's possession or control from time to
time; and/or (7) terminate, or cease extending credit under, any or all
outstanding commitments or credit accommodations of Lender to
SteelCloud.
As an
inducement to the Lender to make the loan, we agreed to issue to the Lender a
warrant (the “Credit Warrant”) to purchase 2.5 shares of our common stock for
every dollar we borrow pursuant to the Credit and Security
Agreement. The Credit Warrant is exercisable for four years at an
exercise price of $0.25 per share. The exercise price may be adjusted
in the event of any stock dividend, stock split, stock combination,
reclassification or similar transaction. Additionally, our Board of Directors
(the “Board”) has the discretion to reduce the then-current exercise price to
any amount at any time during the term of the Warrant for any period of time the
Board deems appropriate. We have agreed to prepare and file a
registration statement for the purposes of registering the resale of the shares
of common stock underlying the Credit Warrant, commencing on or about December31, 2009.
On
November 4, 2009, we borrowed $60,000 pursuant to the Credit and Security
Agreement and the Credit Note, and issued to the Lender a Credit Warrant to
purchase up to 150,000 shares of our common stock pursuant to the Credit and
Security Agreement. On November 23, 2009, we borrowed the additional
$90,000 pursuant to the Credit and Security Agreement and the Credit Note, and
issued to the Lender a Credit Warrant to purchase up to 225,000 shares of our
common stock.
July
2009 Sale of Integration Business
On July10, 2009, we entered into an Asset Purchase Agreement (the “Agreement”) with NCS
Technologies, Inc., a Virginia corporation (referred to herein as “NCS”),
pursuant to which we agreed to sell to NCS, and NCS agreed to purchase from us,
all of our right, title and interest in and to the assets relating to our
computer integration business. The purchase price was $475,000
of which $150,000 was paid as a deposit and the remaining $325,000 is payable
from and to the extent of revenue NCS receives during the three-year period
after the closing date from certain existing and prospective clients, at a rate
equal to 15% of the net sales price received by NCS from such
clients. Any payments by NCS to us are due on or before the 10 th
business day following the month in which NCS receives the payments from the
client(s).
15
We have
classified the integration business as discontinued operations in our financial
statements .
July
2009 Loan and Note Payable
On July1, 2009, we entered into a Business Loan and Security Agreement (the
“Agreement”) with Caledonia Capital Corporation, a Delaware Corporation
(referred to herein as the “Lender”) pursuant to which the Lender agreed to lend
us $250,000 in the form of a Secured Promissory Note (the “Note”) which was
issued on July 1, 2009. The Note originally provided for a maturity date of
December 29, 2009 (the “Maturity Date”) and an annual interest rate of
15%. The Note was amended on December 29, 2009 to provide that (a)
the annual interest rate of the Note is 20%, (b) accrued interest under the Note
shall be payable in monthly installments commencing February 1, 2010, and
continuing on the first business day of each successive month, and (c) the
Maturity Date is March 31, 2010. There are no penalties for early
prepayment of the Note.
In the
event that any installment of principal and/or interest due under the Note is
not received by the Lender within ten (10) days after the date when the same is
due, then we shall be required to pay a late charge of 5.0% of such
installment. Additionally, in the event that we receive investments
from one or more investors in one or more transactions in an aggregate amount in
excess of $750,000, whether in the form of cash, negotiable or non-negotiable
instruments or any form of payment in exchange for the issuance of any
certificated or non-certificated security, whether in the form of debt or equity
(an “Equity Raise”), at any time between the Issuance Date and the Maturity
Date, shall be required, within five (5) business days after the Equity Raise
first exceeds $750,000, to curtail the accrued interest and outstanding
principal balance of the Note by an amount equal to the amount by which the
Equity Raise then exceeds $750,000 (but in no event by more than the then
outstanding principal balance and interest accrued on the Note). Until delivery
of such funds to the Lender, all such funds shall be deemed held in trust by us
for and on behalf of the Lender. All funds that we deliver to the
Lender from the Equity Raise shall be deemed prepayments of the
Note.
Pursuant
to the Agreement and the Note, our obligations thereunder are secured by a first
priority lien in and to all of our intellectual property rights, title and
interest in and to the SteelWorks® Mobile integrated server appliance
software.
As an
inducement to the Lender to make the loan, we issued to the Lender a warrant to
purchase up to 625,000 shares of our common stock, par value $0.001 per
share. The Warrant is exercisable for four years at an exercise price
of $0.15 per share. We determined fair value of these warrants
utilizing the Black-Sholes method. The fair value of these warrants
at issuance date was approximately $130,000. As an inducement for the Lender to
amend the terms of the Note, we agreed to pay the Lender $25,000.
June
2009 Board of Directors Investment
On June15, 2009, we sold an aggregate of 350,000 shares of our common stock, $.001 par
value, to our seven directors, for aggregate cash proceeds of
$87,500. The shares of common stock were sold at $0.25 per share, or
$.01 higher than the closing price of the common stock on the date of
sale. Each share of common stock is accompanied by one warrant to
purchase one additional share of common stock (the “Warrant”). The
Warrants are exercisable for five years from the date of issuance at an exercise
price of $0.25 per share. The seven directors entered into
lock-up agreements with us, restricting their ability to exercise the warrants
until we received shareholder approval for the issuance of the
Warrants. We received shareholder approval for the issuance on
October 23, 2009.
BLACKBERRY®
ENTERPRISE SERVER SOLUTION (STEELWORKS®)
We
developed an integrated appliance solution specifically for the Blackberry
Enterprise Server (“BES”). Developed in conjunction with RIM, we
believe the BES appliance solution is the single best way to implement the BES
software environment for most customers, at a fraction of the time, cost and
resource commitment. SteelWorks is an appliance management software that
provides self-management and self-maintenance functionality to our appliance
server offerings and allows our customers to quickly create a fully integrated
turnkey appliance server. We are working to expand SteelWorks® to
address the needs of small to midsize businesses that require access to company
data and attachments via their Blackberry handheld device. This
product is called SteelWorks® Mobile for the Blackberry Enterprise
Server. This mobile business solution makes a BlackBerry® connection
to company data and attachments easy to install and easy to
manage. It is hardware and software in , what we believe to be, a low
cost easy to install solution.
In
addition, we developed SteelWorks Fed Mobile , our Blackberry
Enterprise Server software appliance solution specifically for the Department of
Defense (“DoD”) and other related agencies. The SteelWorks Fed Mobile appliance builds upon
our commercial appliance by automating the application of the Defense
Information Systems Agency’s (“DISA”) and DoD’s Security Technical
Implementation Guide (“STIG ”) to the BES installation process. The
STIG mandates the policies for which the DoD and related agencies must operate
their wireless communications. As a result, our appliance solution
allows those agencies to be STIG compliant in a fraction of the time, cost or
resources allocated to what is an otherwise time intensive , manual process.
We have introduced our new BES 5.0 SteelWorks Fed Mobile appliance product in
the second fiscal quarter of fiscal year 2010.
PROFESSIONAL
SERVICES
We
provide information technology (“IT”) consulting and contract staffing solutions
for our clients. Our consultants are subject matter experts in
network infrastructure complexities and security technologies . On
January 11, 2010, we sold a large portion of our professional services assets to
Global Technology Partners, Inc. Please see “ Business – Recent Developments -
January 2010 Sale of Certain Professional Services Assets ” for
additional information .
During
fiscal year 2009, we provided services on a contract for a major federal
institution. The contract called for us to provide various IT
services. Over the last twelve months during the contract engagement,
we recognized approximately $586,000 of service revenue associated with this
contract.
RESEARCH
AND PRODUCT DEVELOPMENT
By
investing in product development, we believe that we will have more control over
the functionality and marketing of our products. We also believe that
the resulting intellectual property will increase the competitiveness of our
offerings and improve product margins. During our fiscal year ended
October 31, 2009, we incurred research and development costs of approximately $
233,000. We will continue to incur costs for product development in the future.
We invest in intellectual property in the form of proprietary
products such as SteelWorks®.
MARKETING
We market
our products and services to commercial and government customers, both
domestically and internationally through a number of direct and indirect
channels. We believe that the key to success with our current product
offerings is to build a competent and diverse channel sales organization
encompassing distributors, hosters, and value added resellers
worldwide. We intend to leverage our current channel relationships
domestically and to grow our international channel relationships in fiscal year
2010.
We use
electronic commerce technologies in our marketing efforts and expect our
customers will continue to utilize these technologies. We also use
the Internet to research and reference vendor information. We
maintain an Internet website containing product offerings located at www.steelcloud.com. We
intend to increase our Web 2.0 and social marketing initiatives in fiscal year
2010.
JOINT
VENTURE
In
October 2008, we created a joint venture in the United Arab Emirates ( “ UAE ” )
region with XSAT SteelCloud MEA, LLC (Middle East, Africa) the newly formed
joint venture company, is jointly owned, 20% by XSAT and 80% by
SteelCloud. Under the terms of the joint agreement, XSAT will provide
a local presence for our products to its customers within the UAE
region. XSAT will also provide warranty and support for the products
sold within that region.
Our
products assist organizations with the installation and maintenance of their
BlackBerry network environment. Our products provide the end user
base with an alternative means to perform the installation and maintenance
process. There are currently no other products available in the
marketplace that compete with SteelWorks® Mobile or SteelWorks
FedMobile.
Our main
source of competition is from individuals within organizations who choose to
install and maintain their BlackBerry network environment internally and without
the aid of our products.
Management
believes that it maintains a strong relationship with RIM, the maker of the
BlackBerry line of products. Management further believes that our
relationship with RIM may be a barrier to entry for other organizations that may
seek to enter this market.
SUPPLIERS
We devote
significant resources to establishing and maintaining relationships with key
suppliers. We have recently executed an Original Equipment
Manufacturer partnership agreement with Dell, Inc. (“Dell”) which provides that
Dell will supply SteelWorks Mobile and SteelWorks FedMobile on their network
servers. SteelWorks Mobile and SteelWorks FedMobile will be
manufactured and produced by Dell. In addition, Dell will
supply the logistics and warranty support for the
hardware. Dell will be the primary vendor for SteelWorks Mobile
and SteelWorks FedMobile, however, we intend to maintain relationships with
multiple vendors to manufacture and produce our products should the need
arise.
PATENTS,
TRADEMARKS AND LICENSES
We work
closely with computer product suppliers and other technology developers to stay
abreast of the latest developments in computer technology. While we
do not believe our continued success depends upon the rights to a patent
portfolio, there can be no assurance that we will continue to have access to
existing or new technology for use in our products.
On March20, 2008, we were issued patent 3,396,156 titled ”SteelWorks.”
On
September 15, 2008, we were issued community trademark Registration 006430359
(European); Japan #948064 (International), Canada Application Approval titled
“SteelRestore.”
On
October 21, 2008, we were issued patent 3,521,899 titled “Sure
Audit.”
We
conduct our business under the trademarks and service marks of “SteelCloud,”“SteelCloud Company” and “Dunn Computer Corporation.” We believe our
copyrights, trademarks and service marks have significant value and are an
important factor in the marketing of our products.
18
GOING
CONCERN
We have
had recurring annual operating losses since our fiscal year ended October 31,2004. We expect that such losses may continue at least through our
fiscal year ending October 31, 2010. The report of our independent
registered public accounting firm regarding our consolidated financial
statements for the fiscal year ended October 31, 2009 contains an explanatory
paragraph regarding our ability to continue as a going concern based upon our
history of net losses and net working capital deficit and expresses
significant doubt as to whether we will be able to meet obligations coming due
in the future .
We are
dependent upon available cash and operating cash flow to meet our capital
needs. We are considering all strategic options to improve our
liquidity and obtain working capital to fund our continuing business operations
, including equity or debt offerings and asset sales; however, there can be no
assurance that we will be successful in negotiating financing on terms agreeable
to us or at all. If adequate funds are not available or are not
available on acceptable terms, we will likely not be able to take advantage of
unanticipated opportunities, develop or enhance services or products, respond to
competitive pressures, or continue as a going concern. We can offer
no assurances that we will be successful in raising working capital as
needed. Further, we can offer no assurances that we will have
sufficient funds to execute our business plan, pay our operating expenses and
obligations as they become due or generate positive operating results or
continue as a going concern.
EMPLOYEES
As of
October 31, 2009, and March 11, 2010, we had 15 and 10 employees,
respectively. None of our employees are covered by a collective
bargaining agreement and we consider our relationships with our employees to be
good.
We
believe our future success depends in large part upon our continued ability to
attract and retain highly qualified management, technical, and sales
personnel. We have an in-house training and mentoring program to
develop our own supply of highly qualified technical support
specialists. There can be no assurance, however, that we will be able
to attract and retain the qualified personnel necessary for our
business.
PRINCIPAL
EXECUTIVE OFFICES
Our
principal executive offices are located at 20110 Ashbrook Place, Suite 130,
Ashburn, Virginia20147. Our telephone number is (703) 674-5500, fax
number is (703) 450-0407 and our website address is www.steelcloud.com. The
information on our website is not incorporated by reference into this prospectus
and should not be relied upon with respect to this offering.
DESCRIPTION
OF PROPERTY
Until
February 19, 2010, we leased approximately 24,000 square feet of office space in
Herndon, Virginia for a monthly rent of approximately $21,000.
We are currently negotiating a settlement with our landlord to
terminate this lease in advance of its expiration in December 2015.
On
February 2, 2010, we entered into a Lease Agreement (the “February Lease”) with
Merritt-AB5, LLC (the “Landlord”), pursuant to which we agreed to rent
approximately 3,461 square feet in the property located at 20110 Ashbrook Place,
Suite 130, Ashburn, Virginia20147 (the “Premises”) for our operations
facility. We moved into the Premises on February 19,2010. The term of the February Lease is for one year beginning on the
later to occur of (i) February 15, 2010, (ii) the date the Landlord completes
certain work on the premises, or (iii) the date when we occupy the Premises (the
“Term”). The Term may be extended for two additional successive
one year periods. The monthly rate is $6,489.38, or $77,872.50 for
the first year, inclusive of operating expenses. If we determine to
extend the term, the monthly rent for the second year will be $6,684.06 or
$80,208.68 per year, and the monthly rent for the third year will be $6,884.58
or $82,614.94 per year.
19
LEGAL
PROCEEDINGS
On May22, 2009, we entered into a Stipulation/Consent Order with CRP (the
“Stipulation”), pursuant to an Affidavit and Statement of Account (the
“Affidavit”), stating, as declared by a general manager of Jones Lang LaSalle, a
property management company and agent for CRP Holdings A-1, LLC (“CRP”), the
landlord of 14040 Park Center Road, Suite 210, Herndon, Virginia20171 (the
“Premises”), that CRP, as landlord, was seeking a judgment against us for: (i)
possession of the Premises, and (ii) monetary damages for nonpayment of rent due
under a sublease, dated September 28, 2004, by and between us and NEC America,
Inc. (“NEC”) (the “Sublease”), and a subsequent assignment of the Sublease to
CRP from NEC, dated December 15, 2008. In the Stipulation we
acknowledged that the balance due for rent and additional rent for the Premises
was $168,637.96, together with attorney’s fees and court expenses of $7,041.00
through May 22, 2009 (the “Judgment Amount”). Pursuant to the
Stipulation, we paid $30,000 (the “Forbearance Payment”) on May 22, 2009 toward
the Judgment Amount. Further we agreed to, and have, vacated the
Premises. CRP agreed to stay enforcement of the Judgment Amount until
the earlier of (a) our receipt of capital in the amount of at least $500,000, or
(b) May 31, 2010. The matter was returned to the court’s files
pending our compliance with the terms of the Stipulation.
There are
routine legal claims pending against us that occur in the ordinary course of
business, but in the opinion of management, liabilities, if any, arising from
such claims will not have a material adverse effect on our financial condition
and results of operation.
Other
than the items previously disclosed we are not a party to any other material
legal proceedings.
20
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock was listed on The NASDAQ Stock Market, Inc.’s Capital Market from
April 22, 1997 through January 7, 2010. We changed our symbol from
“DNCC” to “SCLD” on October 19, 2000. On January 7,2010, our symbol was changed from “SCLD” to “SCLD.PK”. On January 27,2010, our symbol was changed from “SCLD.PK” to “SCLD.OB.”
The
following table sets forth the high and low selling prices as reported on the
NASDAQ Capital Market for our second fiscal quarter of 2010 through March11, 2010 and for each fiscal quarter during the fiscal years ended October 31,2009 and 2008. These quotations reflect inter-dealer prices without
retail mark-up, markdown, or commission and may not represent actual
transactions. On January 7, 2010 our common stock was delisted from The NASDAQ
Stock Market, Inc.’s Capital Market . Our common stock is currently
quoted on the Over-the-Counter Bulletin Board .
We have
not paid cash dividends on our common stock and do not intend to do so in the
foreseeable future.
21
Equity
Compensation Plan Information
The
following table sets forth the number of securities to be issued upon the
exercise of outstanding options, warrants and rights which were issued pursuant
to our equity compensation plans as of October 31, 2009.
Equity
Compensation Plan Information
Plan category
Number of securities to
be issued upon exercise of outstanding options, warrants and
rights1
Weighted-average
exercise price
of outstanding options,
warrants and
rights
Number of
securities remaining available for
future issuance
under equity
compensation
plans (excluding
securities reflected
in column
(a))
(a)
(b)
(c)
Equity
compensation plans approved by security holders1
1,321,500
0.57
1,759,225
2
Equity
compensation plans not approved by security holders
-0-
N/A
-0-
Total
1,321,500
0.57
1,759,225
1
Includes
456,210 options pursuant to our 2002 Option Plan, 1,035,250 options
pursuant to our 2007 Option Plan, and 267,765 options pursuant to our
Purchase Plan. Please see “Executive Compensation – Narrative
Disclosure to Summary Compensation Table – Equity-Based Compensation” at
page 40 for additional information regarding the foregoing
plans. All of the remaining 1,035,250 shares under our Amended
2007 Stock Option and Restricted Stock Plan may be issued in the form of
options or restricted stock.
NASDAQ
On
March 23, 2009, we received notice, under NASDAQ Marketplace Rule 4310(c)(3),
that our common stock was subject to potential delisting from the NASDAQ Stock
Market, Inc.'s Capital Market because we did not meet the criteria of NASDAQ
Listing Rule 5550(b) (the “Rule”) and did not have a minimum of $2,500,000 in
stockholders’ equity, $35,000,000 market value of listed securities, or $500,000
of net income from continuing operations for the most recently completed fiscal
year or two of the three most recently completed fiscal years. We
provided NASDAQ with a specific plan of how we intended to achieve and sustain
compliance with all the NASDAQ Capital Market listing requirements, including a
time frame for completion of such plan. On April 28, 2009 we received
notice from NASDAQ indicating that our request for an extension of time to
regain compliance with the Rule had been granted . Pursuant to the
terms of the extension, we were required to: (a) on or before July 6, 2009,
complete an equity transaction or a merger and/or acquisition, and (b) make
appropriate disclosures to the SEC and NASDAQ on a Form
8-K. We were not able to complete an equity transaction
or a merger and/or acquisition by July 6, 2009, and on July 8, 2009, we received
written notification from NASDAQ stating that we did not meet the terms of the
extension, and that, as a result, our common stock would be subject to delisting
and trading in our common stock would be suspended at the opening of business on
July 17, 2009. On July 15, 2009, we requested a hearing to
appeal the determination before a NASDAQ Hearings Panel ( the “ Panel ”) and to
present our plan for regaining compliance with the Rule (the
“Appeal”). On August 4, 2009, we received notice that NASDAQ received
our Appeal, and that the delisting action has been stayed, pending a final
written decision by the Panel after an oral hearing (the “Hearing”), where we
were required to demonstrate our ability to regain and sustain compliance with
the Rule. The Hearing was held at 11:00 A.M. EST, on September 3,2009. On October 7, 2009, we received notice that the Panel
granted our request for continued listing, subject to our evidencing, on or
before January 4, 2010, compliance with the Rule and all other requirements for
continued listing. We were unable to regain compliance with the Rule
on or before January 4, 2010, and on January 5, 2010, we received notice from
NASDAQ indicating that the Panel determined to delist our securities and trading
in our securities would be suspended effective as of the open of trading on
Thursday, January 7, 2010. We do not intend to take any further
action to appeal NASDAQ's decision. Accordingly, trading of our common stock was
suspended at the opening of business on January 7, 2010, and NASDAQ filed a Form
25-NSE with the SEC on March 9, 2010. Shares of our common stock are now traded
on the Over-the-Counter Bulletin Board.
22
FINANCIAL
STATEMENTS
Index
to Financial Statements
SteelCloud,
Inc. (a Virginia Corporation)
Report
of Independent Registered Public Accounting Firm
Consolidated
Statements of Operations for the two years ended October 31,2009
F-3
Consolidated
Statements of Stockholders' Equity for the two years ended October 31,2009
F-4
Consolidated
Statements of Cash Flows for the two years ended October 31,2009
F-5
Notes
to Consolidated Financial Statements
F-6
23
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
SteelCloud,
Inc.
We have
audited the accompanying consolidated balance sheets of SteelCloud, Inc. (a
Virginia Corporation) and subsidiaries (the Company) as of October 31, 2009 and
2008, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the two years in the period ended October 31,2009. Our audits of the basic financial statements included the
financial statement schedule listed in the index appearing under Item 15 (a)
2. These financial statements and financial statement schedule are
the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of October31, 2009 and 2008, and the results of its operations and its cash flows for each
of the two years in the period ended October 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1, the Company
incurred a net loss of $ 3,736,562 during the year ended October 31, 2009, and,
as of that date, the Company had an accumulated deficit of $ 48,605,126 and a
working capital deficit of $ 576,350. These factors, among others,
as discussed in Note 1 to the consolidated financial statements, raise
substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Preferred
stock, $.001 par value; 2,000,000 shares authorized, 0 and 0 shares issued
and outstanding at October 31, 2008 and 2009, respectively
-
-
Common
stock, $.001 par value; 50,000,000 and 80,000,000 shares authorized
15,138,376 and 15,993,501 shares issued at October 31, 2008 and 2009,
respectively
Net
cash provided by (used in) operating activities
(
2,360,017
)
(1,577,795
)
Cash
Flows from Investing activities
Proceeds
from sale of equipment
-
90,882
Proceeds
from sale of discontinued operations
-
150,000
Proceeds
from sale of leased assets
-
332,958
Purchase
of property and equipment
(424,641
)
(9,805
)
Net
cash provided by (used in) investing activities
(424,641
)
564,035
Cash
Flows from Financing activities
Proceeds
from note payable
-
250,000
Proceeds
from issuance of common stock
-
87,500
Proceeds
from exercise of common stock options
244,912
-
Payments
on notes payable
(12,843
)
(15,441
)
Net
cash provided by (used in) financing activities
232,069
322,059
Net
increase (decrease) in cash and cash equivalents
(1,870,303
)
(691,701
)
Cash
and cash equivalents at beginning of year
2,622,654
752,351
Cash
and cash equivalents at end of year
$
752,351
$
60,650
Supplemental
disclosure of cash flows information
Interest
paid
$
18,370
$
79,159
Income
taxes paid
-
-
Supplemental
disclosure of non-cash investing and financing activities
Discount
on note payable
-
$
85,575
Common
stock issued for services
-
$
35,000
See
accompanying footnotes.
F-5
1. Organization
Founded
in 1987, SteelCloud, Inc. (referred to herein as the “Company,” or “SteelCloud”)
is a developer of mobility appliance software solutions primarily for the
Research In Motion® (“RIM”) BlackBerry market. SteelCloud designs and
integrates its software into specialized server appliances targeted at
Department of Defense (“DoD”), public sector, commercial, and remote hosting
customers. Until July 2009, SteelCloud offered computer
integration solutions for the federal marketplace and Independent Software
Vendors. In July 2009, SteelCloud entered into an Asset Purchase
Agreement with NCS Technologies, Inc., a Virginia corporation (“NCS”), pursuant
to which SteelCloud agreed to sell to NCS, and NCS agreed to purchase, all of
SteelCloud’s right, title and interest in and to the assets relating to our
computer integration business. Further, in July 2009
SteelCloud’s management and Board of Directors determined to shift the focus of
our operations, resources and investments to our BlackBerry-related technologies
and products.
SteelCloud
was originally incorporated as Dunn Computer Operating Company on July 27, 1987
under the laws of the Commonwealth of Virginia. On February 26, 1998,
Dunn Computer Corporation ("Dunn") was formed and incorporated in the
Commonwealth of Virginia to become a holding company for several entities
including Dunn Computer Operating Company. The Company's subsidiary
is International Data Products ("IDP"), acquired in May 1998. On May15, 2001, the shareholders approved an amendment to the Company’s articles of
incorporation to change the corporate name from Dunn Computer Corporation to
SteelCloud, Inc. On December 31, 2003, Dunn was merged with and into
SteelCloud. On February 17, 2004, the Company acquired the assets of
Asgard Holding, LLC ("Asgard"). In July of 2006, as part of its
restructuring efforts, the Company closed its sales office and ceased all of its
operations in Florida. The Company’s former subsidiaries, Puerto Rico
Industrial Manufacturing Operations Acquisition Corporation (“PRIMO”), and STMS
Corporation (“STMS”), are inactive.
The
accompanying financial statements include the accounts of SteelCloud and its
subsidiaries, International Data Products Corporation (“IDP”), Puerto Rico
Industrial Manufacturing Operations Acquisition Corporation (“PRIMO”), and STMS
Corporation (“STMS”). All intercompany accounts and activity have
been eliminated in the consolidation process.
Going
Concern
SteelCloud
has had recurring annual operating losses since its fiscal year ended October31, 2004. SteelCloud expects that such losses may continue at least
through its fiscal year ending October 31, 2010. The report of
SteelCloud’s independent registered public accounting firm on SteelCloud’s
consolidated financial statements for the fiscal year ended October 31, 2009
contains an explanatory paragraph regarding SteelCloud’s ability to continue as
a going concern based upon its history of net losses, net working capital
deficit and uncertainty regarding its ability to satisfy its obligations as they
come due in the near term.
SteelCloud
is dependent upon available cash and operating cash flow to meet its capital
needs. SteelCloud is considering all strategic options to improve its
liquidity and provide it with working capital to fund its continuing business
operations, including equity offerings, asset sales or debt; however, there can
be no assurance that SteelCloud will be successful in negotiating financing on
terms agreeable to it or at all. If adequate funds are not available
or are not available on acceptable terms, SteelCloud will likely not be able to
take advantage of unanticipated opportunities, develop or enhance services or
products, respond to competitive pressures, or continue as a going
concern. There are no assurances that SteelCloud will be successful
in raising working capital as needed. Further, there are no
assurances that SteelCloud will have sufficient funds to execute its business
plan, pay its operating expenses and obligations as they become due or generate
positive operating results or continue as a going concern.
F-6
2. Sale
of Integration Business
On July10, 2009, SteelCloud entered into an Asset Purchase Agreement (the “Agreement”)
with NCS Technologies, Inc., a Virginia corporation (“NCS”), pursuant to which
SteelCloud agreed to sell to NCS, and NCS agreed to purchase from SteelCloud,
all of SteelCloud’s right, title and interest in and to the assets relating to
SteelCloud’s computer integration business. The purchase price
was $475,000 of which $150,000 was paid as a deposit and the remaining $325,000
is an earn-out amount, which is payable from and to the extent of revenue NCS
receives during the three-year period after the closing date from certain
existing and prospective clients, at a rate equal to 15% of the net sales price
received by NCS from such clients. Any payments by NCS to us are due
on or before the 10 th
business day following the month in which NCS receives the payments from the
client(s).
SteelCloud
has classified the integration business as discontinued operations for the
twelve month period ending October 31, 2009 as well as all comparative periods
presented. Certain amounts have been reclassified in order to conform
to current period presentation.
3. Significant
Accounting Policies
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Revenue
Recognition
The
Company recognizes revenue when all four basic criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services
rendered; (3) the fee is fixed and determinable: and (4) collectability is
reasonably assured.
In the
event the Company enters into a multiple element arrangement and there are
undelivered elements as of the balance sheet date, the Company assesses whether
the elements are separable and have determinable fair value in determining the
amount of revenue to record.
The
Company collects and remits sales and property taxes on products and services
that it purchases and sells under its contracts with customers, and reports such
amounts under the net method in its consolidated statements of
operations. Accordingly, there are no sales and property taxes
included in gross revenue.
The
Company derives its revenue from the following sources: product revenue,
information technology support services, software license as a reseller and
support revenue and software training and implementation revenue.
For
product sales where title transfers upon shipment and risk of loss transfers to
the customer, the Company generally recognizes revenue at the time of
shipment. For product sales where title and risk of loss transfers
upon destination, the Company generally recognizes revenue when products reach
their destination. Revenue from hardware leased to customers under
operating lease arrangements is recognized over the contract
term. When product and installation services that are not essential
to the functionality of the product are sold as part of a bundled agreement, the
fair value of the installation services, based on the price charged for the
services when sold separately, is deferred and recognized when the services are
performed. The products sold are generally covered by a warranty for
periods ranging from one to three years. The Company previously
accrued an estimated warranty reserve in the period of sale to provide for
estimated costs to provide warranty services; as part of the agreement with Dell
to produce the Company’s appliance hardware, SteelCloud currently purchases an
on-site three year warranty from Dell with each unit. This warranty
is transferred to the appliance end user and warranty service is provided
directly to the customer by Dell.
F-7
When the
Company acts as a reseller, the Company monitors the terms of each new
transaction to assess whether ASC 605-45, “Reporting Revenue Gross as a
Principal versus Net as an Agent” applies to its financial reporting for such
transaction. In accordance with this standard, the Company recognizes
revenue associated with the resale of service contracts on a gross
basis.
In
October 2008 the Company began delivering its appliance solution specifically
developed for Blackberry Enterprise Servers (“BES”). The software
does not require significant modification and customization
services. The Company does not have vendor-specific objective
evidence (“VSOE”) of fair value for its software. Accordingly, when
the software is sold in conjunction with the Company’s hardware, software
revenue is recognized upon delivery of the hardware.
For
services revenue under time and material contracts, the Company recognizes
revenue as services are provided based on the hours of service at stated
contractual rates.
The
Company is a value-added solution provider for certain software
products. When resold software licenses, and related maintenance,
customization and training services are all provided together to an individual
customer the Company recognizes revenue for the arrangement after the Company
has delivered the software license and the customer has approved all
implementation and training services provided. In instances where the
Company only resells the software license and maintenance to the customer, the
Company recognizes revenue after the customer has acknowledged and accepted
delivery of the software. The software manufacturer is responsible
for providing software maintenance. Accordingly, revenue from
maintenance contracts is recognized upon delivery or acceptance, as the Company
has no future obligation to provide the maintenance services and no right of
return exists.
The
Company incurs shipping and handling costs, which are recorded in cost of
revenues.
Deferred
revenue includes amounts received from customers for which revenue has not been
recognized. This generally results from certain customer contracts,
ISV releases, warranties, hardware maintenance and support, and consulting
services. The deferred revenue associated with customer contracts and
ISV releases represents payments received for milestones achieved prior to
recognition of revenue. This revenue will be recognized as products
are shipped. Revenues from warranties and hardware maintenance and
support are recognized ratably over the service term selected by the
customer. Deferred service revenues from consulting are recognized as
the services are performed.
Significant
Customers
During
fiscal year 2009, contracts with two federal government customers, represented
approximately $775,000 of SteelCloud’s net revenues or 51% of total net
revenues, respectively, for the fiscal year 2009. Given the nature of
the products offered by us as well as the delivery schedules established by
SteelCloud’s partners, revenue and accounts receivable concentration by any
single customer will fluctuate from year to year. Future revenues and
results of operations could be adversely affected should these customers reduce
their purchases, eliminate product lines or choose not to continue to buy
products and services from us.
Equity-Based
Compensation
Share-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized over the employee’s requisite service
period. The fair value of the Company’s stock options and employee
stock purchase plan (“ESPP”) awards are estimated using a Black-Scholes option
valuation model. This model requires the input of highly subjective
assumptions and elections, including expected stock price volatility and the
estimated life of each award. The fair value of equity-based awards
is amortized over the vesting period of the award and the Company has elected to
use the straight-line method for amortizing its stock option and ESPP
awards. Compensation costs for all awards granted after the date of
adoption and the unvested portion of previously granted awards outstanding are
measured at their estimated fair value.
F-8
Other
Equity-Based Compensation
The
Company accounts for equity instruments issued in exchange for the receipt of
goods or services from other than employees and non-employee directors at the
estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably
measurable. The value of equity instruments issued for consideration
other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or
services. Stock-based compensation recognized under SFAS No. 123 and
EITF 96-18 for services from non-employees was $55,550 and $47,288 during the
fiscal years ended October 31, 2008 and 2009, respectively.
Income
Taxes
The
Company recognizes deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of certain assets and liabilities. A valuation allowance is
established, as necessary, to reduce deferred income tax assets to an amount
expected to be realized in future periods. The Company determines its
valuation allowance by weighing all positive and negative evidence including
past operating results and forecasts of future taxable income. In
assessing the amount of the valuation allowance as of October 31, 2008 and 2009,
the Company considered, in particular, its forecasted operations for the
upcoming fiscal year, current backlog of orders, including those recently
received, and other significant opportunities currently in its sales and
marketing pipeline with a high probability of generating
revenues. Based upon this review, the Company will continue to fully
reserve for all deferred tax assets as of October 31, 2009.
SteelCloud
accounts for uncertainty in income taxes using a more-likely-than-not
recognition threshold based on the technical merits of the tax position
taken. Tax positions that meet the more-likely-than-not recognition
threshold should be measured as the largest amount of the tax benefits,
determined on a cumulative probability basis, which is more likely than not to
be realized upon effective settlement in the financial
statements. The Company’s accounting policy is to recognize
interest and penalties related to income tax matters in general and
administrative expense.
Inventory
Inventory
consists of materials and components used in the assembly of the Company’s
products or maintained to support maintenance and warranty obligations and are
stated at the lower of cost or market using actual costs on a first-in,
first-out basis. The Company maintains a perpetual inventory system
and continuously records the quantity on-hand and actual cost for each product,
including purchased components, subassemblies and finished goods. The
Company maintains the integrity of perpetual inventory records through periodic
physical counts of quantities on hand. Finished goods are reported as
inventory until the point of title transfer to the
customer. Generally, title transfer is documented in the terms of
sale. When the terms of sale do not specify, the Company assumes
title transfers when it completes physical transfer of the products to the
freight carrier unless other customer practices prevail.
The
Company periodically evaluates its inventory obsolescence reserve to ensure
inventory is recorded at its net realizable value. The Company’s
policy is to assess the valuation of all inventories, including manufacturing
raw materials, work-in-process, finished goods and spare parts in each reporting
period. Inherent in managements estimates of excess and obsolete
inventory are management’s forecasts related to the Company’s future
manufacturing schedules, customer demand, technological and/or market
obsolescence and possible alternative uses. If future customer demand
or market conditions are less favorable than the Company’s projections,
additional inventory write-downs may be required, and would be reflected in cost
of sales in the period the revision is made. For the fiscal year
ending 2008 and 2009 the Company incurred charges to expense of $ 186,000 and $
72,000, respectively, associated with excess and obsolete inventory cost
adjustments.
F-9
Warranty
As
part of the agreement with Dell to produce the Company’s appliance hardware,
SteelCloud purchases an on-site three year warranty from Dell with each
unit. This warranty is transferred to the appliance end user and
warranty service is provided directly to the customer by Dell.
Warranty
and service support for BlackBerry software is provided directly to the user by
RIM as part of the software license agreement. End users contact RIM
directly for support .
SteelCloud
periodically monitors the performance and cost of warranty activities for other
technology that SteelCloud develops.
Research
and Product Development Expenses
The
Company expenses research and product development costs as
incurred. These costs consist primarily of labor charges associated
with development of the Company’s commercial and federal integrator
products. These research and development expenses amounted to
approximately $ 234,000 and $ 233,000 during fiscal 2008 and 2009,
respectively.
The
Company invests in intellectual property in the form of proprietary products
such as SteelWorks®.
Cash
and Cash Equivalents
The
Company maintains demand deposit accounts with principally one financial
institution. At times deposits may exceed federally insured limits,
but management does not consider this a significant concentration of credit risk
based on the strength of the financial institution. The Company
considers all highly liquid investments with a maturity of three months or less
at the time of purchase to be cash equivalents.
Accounts
Receivable
Accounts
receivable are recorded at the invoice amount at the time of
sale. The Company continually monitors the collectability of its
trade receivables based on a combination of factors. The Company maintains
reserves for possible credit losses based upon these evaluations. As
of October 31, 2009 and 2008, the allowance for doubtful accounts was $0 and
$36,000, respectively.
Financial
Instruments and Concentration of Credit Risk
The
carrying value of the Company’s financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities, notes
payable and its line of credit approximates fair value. Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and accounts receivable. The cash is
held by high credit quality financial institutions. For accounts
receivable, the Company performs ongoing credit evaluations of its customers’
financial condition and generally does not require collateral. The
Company maintains reserves for possible credit losses. As of October31, 2008 and 2009, the Company had allowance for doubtful account balances of
approximately $ 36,000 and $ 0, respectively.
Advertising
Expenses
The
Company expenses advertising costs as incurred. Advertising costs
consisted of expenditures for tradeshows, website maintenance, radio
advertisements, and other charges associated with the dissemination of important
Company news and product features to the public. Advertising expense
amounted to approximately $298,000 and $122,000 during fiscal 2008 and 2009,
respectively.
F-10
Earnings
Per Share
The
Company presents basic and fully diluted earnings per share. Basic
earnings per share is based on the weighted average shares outstanding during
the period. Diluted earnings per share increases the shares used in
the basic share calculation by the dilutive effect on net income from continuing
operations of stock options and warrants. The dilutive weighted
average number of common shares outstanding excluded potential common shares
from stock options of approximately 352,000 and 584,000 for the fiscal years
ending October 31, 2008 and 2009, respectively. These shares were
excluded from the earnings per share calculation due to their antidilutive
effect resulting from the loss from operations.
Recent
Pronouncements
In
September 2009, Financial Accounting Standards Board (“FASB”) issued ASC 605-25,
Revenue Recognition -
Multiple-Deliverable Revenue Arrangements, formerly Emerging Issues Task
Force (EITF) 00-21 .
This guidance addresses how to separate deliverables and 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 after December 15, 2009 but may be early adopted as
of the beginning of an annual period. The Company is currently evaluating the
effect that this guidance will have on its financial position and results of
operations.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162, now referred to as ASC 105-10,
Generally Accepted Accounting
Principles . The FASB Accounting Standards Codification (“Codification”)
will become the source of authoritative U.S. generally accepted accounting
principles (“GAAP”) recognized by FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. On the effective date of this
statement, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification will become non-authoritative. This
statement is effective for financial statements issued for interim and annual
periods ending after September 30, 2009. The adoption of this
statement did not have a material effect on the Company’s financial
statements.
In June
2009, the FASB issued SFAS No. 165, later codified in ASC
855-10, Subsequent
Events . ASC 855-10 establishes general standards of for the evaluation,
recognition and disclosure of events and transactions that occur after the
balance sheet date. Although there is new terminology, the standard is based on
the same principles as those that currently exist in the auditing standards. The
standard, which includes a new required disclosure of the date through which an
entity has evaluated subsequent events, is effective for interim or annual
periods ending after June 15, 2009. The adoption of ASC 855-10 did
not have a material effect on the Company’s financial statements.
In April
2009, the FASB issued FASB Staff Position No. 107-1 and APB Opinion No. 28-1
(FSP 107-1 and APB 28-1), later codified in ASC 825-10-65-1, Interim Disclosures about Fair Value
of Financial Instruments . FSP 107-1 and APB 28-1 require fair value
disclosures in both interim, as well as annual, financial statements in order to
provide more timely information about the effects of current market conditions
on financial instruments. FSP 107-1 and APB 28-1 became effective for the
Company in the quarter ended July 31, 2009, and their adoption did not have a
material impact on the Company's financial statements.
In June
2008, the EITF ratified EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock , now referred
to as ASC 815-40-15. ASC 815-40-15 provides guidance in assessing whether
derivative instruments meet the criteria in paragraph 11(a) of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities , now referred to as ASC 815, for
being considered indexed to an entity’s own common stock. ASC 815-40-15 is
effective for fiscal years beginning after December 15, 2008. The adoption of
this statement is not expected to have a material effect on the Company’s
financial statements.
F-11
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets , now referred to as FASB ASC 350-30-65-1. It amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, Goodwill
and Intangible Assets , now referred to as ASC 350. ASC 350-30-65-1 is
effective for fiscal years beginning after December 15, 2008 and may not be
adopted early. The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133, now referred to as ASC 815 . ASC 815 is intended to
improve financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. ASC 815 is effective for financial statements issued for
fiscal years beginning after November 15, 2008, with early adoption encouraged.
The adoption of this statement is not expected to have a material effect on the
Company's financial statements.
In
December 2007, the FASB issued SFAS No.141R, Business Combinations , now
referred to as ASC 805 . ASC 805 establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate and financial effects of
the business combination. The guidance will become effective for the
fiscal year beginning after December 15, 2008. The adoption of this statement is
not expected to have a material effect on the Company's consolidated financial
statements, unless the Company enters into a material business combination
transaction. The Company is in the process of evaluating the effect, if any, the
adoption of ASC 805 will have on its financial statements , if the Company
undertakes an acquisition.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51 , now
referred to as ASC 810. ASC 810 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective for the fiscal year beginning
after December 15, 2008. The Company is in the process of evaluating the effect,
if any , the adoption of ASC 810 will have on its financial
statements.
Property
and equipment, including leasehold improvements, are stated at
cost. Property and equipment are depreciated using the straight-line
method over the estimated useful lives ranging from one to five
years. Furniture and fixtures are depreciated over an estimated
useful life of five years. Leasehold improvements are amortized over
the related lease term.
Any
tenant allowances have been recorded as deferred rent and will be recognized as
a reduction in rent expense over the applicable lease term.
Property
and equipment consisted of the following:
During
the fourth quarter of the fiscal year ended October 31, 2009, the Company
recorded an impairment charge against discontinued operations on its leasehold
improvements of approximately $276,000. This charge should have been
recorded in the third quarter of fiscal 2009 due to the triggering event of the
sale of the computer network business which would have required an impairment
analysis on the remaining assets related to that business. There was
no impact to any other prior periods. The Company evaluated the error
on both a quantitative and qualitative basis under the guidance of "SEC Staff
Accounting Bulletin: No. 99 - Materiality". The Company determined
that the impact of this error did not affect the trend of net losses, cash
flows, or liquidity and therefore was not material to either the third quarter
or fourth quarter financial statements. Accordingly the Company has
not restated the interim financial statements for the third quarter of fiscal
year 2009.
The
Company owned equipment that was at customer sites under multiple operating
lease agreements. The cumulative cost of the equipment was $987,741
at October 31, 2008. This equipment lease was sold in April of 2009
for approximately $61,000, resulting in a loss on sale of approximately
$281,000, which was recorded under discontinued operations . The
Company depreciates its leased property and equipment assets over the lesser of
the related lease term or the useful life of the leased asset. The
related cumulative accumulated depreciation on the equipment was $545,642 in
October 31, 2008. This lease was sold in April of 2009, and
accordingly there is no accumulated depreciation on the equipment ending October31, 2009.
6.
Notes Payable
On July1, 2009, the Company entered into a Business Loan and Security Agreement (the
“Agreement”) with Caledonia Capital Corporation, a Delaware corporation (the
“Lender”) pursuant to which the Lender agreed to lend to SteelCloud $250,000 in
the form of a Secured Promissory Note (the “Note”) which was issued on July 1,2009 (the “Issuance Date”). The Note bears interest at a rate of 15%
per annum, and is payable in quarterly installments commencing three months
after the Issuance Date, or October 1, 2009. The principal amount of
the Note was due and payable in full on December 29, 2009 (The “Maturity
Date”. There are no penalties for early prepayment of the
Note.
On
December 29, 2009, the Company entered into an Allonge to Note (the "Allonge")
with the Lender. The Allonge amends the terms of the Agreement by, among other
things, (a) increasing the annual interest rate of the Note to 20%, (b)
providing that accrued interest under the Note shall be payable in monthly
installments commencing on February 1, 2010, and continuing on the first
business day of each successive month, (c) paying an extension fee of $25,000
and (d) extending the Maturity Date of the Note to March 31,2010.
F-13
Additionally,
in the event that the Company receives investments from one or more investors in
one or more transactions in an aggregate amount in excess of $750,000, whether
in the form of cash, negotiable or non-negotiable instruments or any form of
payment in exchange for the issuance of any certificated or non-certificated
security of the Company, whether in the form of debt or equity (an “Equity
Raise”), at any time between the Issuance Date and the Maturity Date, then, the
Company shall be required, within five (5) business days after the Equity Raise
first exceeds $750,000, to curtail the accrued interest and outstanding
principal balance of the Note by an amount equal to the amount by which the
Equity Raise then exceeds $750,000 (but in no event by more than the then
outstanding principal balance and interest accrued on the Note). Until delivery
of such funds to the Lender, all such funds shall be deemed held in trust by the
Company for and on behalf of the Lender. All funds that the Company
delivers to the Lender from the Equity Raise shall be deemed prepayments of the
Note.
Pursuant
to the Agreement and the Note, the Company’s obligations thereunder are secured
by a first priority lien in and to all of the Company ’s intellectual property
rights, title and interest in and to the SteelWorks® Mobile integrated server
appliance software.
As an
inducement to the Lender to make the loan to the Company, the Company issued to
the Lender a warrant to purchase up to 625,000 shares of the Company’s common
stock, par value $0.001 per share. The Warrant is exercisable for four years at
an exercise price of $0.15 per share. The Company determined the fair
value of these warrants utilizing the Black-Sholes Model. The fair
value of these warrants at issuance date was approximately
$130,000.
The loan
amount of $250,000 was allocated between the note payable and warrants based
upon their relative fair values. The difference between the face amount of the
note of $250,000 and the note payable amount of $164,425 recorded at date of
execution represents the debt discount of $85,575 which will be amortized over
the life of the note. To determine the fair value of the warrants,
management used the Black-Scholes Model which includes assumptions on the period
end stock price, historical stock volatility, risk free interest rate and term
of warrants.
The fair
value of the loan at October 31, 2009 approximates its carrying value due to its
short-term maturity.
Asset
loans, bearing interest at annual interest rates from 0.0% to 4.9% due in
aggregate monthly payments of $ 676, $348 and $359, that
expired in July 2009, July 2008 and July 2008, respectively, secured by
certain assets of the Company
15,441
-
Less
current portion
7,538
217,919
Notes
payable, long-term
$
7,903
$
-
F-14
7. Commitments
Operating
Leases
The
Company ’s current corporate office is located in Herndon, Virginia and consists
of approximately 24,000 square feet of office, manufacturing and warehouse space
held under one lease. In February 2009, the Company entered into a
lease amendment with the landlord of this facility whereby the lease, which was
originally scheduled to expire on August 31, 2014, was amended to provide for
(i) the extension of the lease term for a period of one (1) year and four (4)
months ending on December 31, 2015, and (ii) certain other modifications,
including a reduction in SteelCloud’s rent cash payments by approximately
$60,000 and $34,000 for the fiscal years 2009 and 2010,
respectively. SteelCloud’s monthly straight-line rent expense will be
approximately $21,000 a month for the remainder of the lease .
In May
2009, the Company entered into a Stipulation/Consent Order with CRP (the
“Stipulation”), pursuant to an Affidavit and Statement of Account (the
“Affidavit”), stating, as declared by a general manager of Jones Lang LaSalle, a
property management company and agent for CRP Holdings A-1, LLC (“CRP”), the
landlord of 14040 Park Center Road, Suite 210, Herndon, Virginia20171 (the
“Premises”), the Company’s previous corporate office, that CRP, as landlord, was
seeking a judgment against the Company for: (i) possession of the Premises, and
(ii) monetary damages for nonpayment of rent due under a sublease. In
the Stipulation the Company acknowledged that the balance due for rent and
additional rent for the Premises was $168,637.96, together with attorney’s fees
and court expenses of $7,041.00 through May 22, 2009 (the “Judgment
Amount”). Pursuant to the Stipulation, the Company paid $30,000 (the
“Forbearance Payment”) on May 22, 2009 toward the Judgment Amount. In
May 2009, the Company vacated the premises. CRP agreed to stay
enforcement of the Judgment Amount until the earlier of (a) SteelCloud’s receipt
of capital in the amount of at least $500,000, or (b) May 31,2010. The matter was returned to the court’s files pending
SteelCloud’s compliance with the terms of the Stipulation.
The
Company recognizes rent holiday periods, scheduled rent increases and tenant
improvement allowances on a straight-line basis over the lease term beginning
with the commencement date of the lease. Rent expense under these
leases, which is recorded on a straight-line basis over the life of each lease,
was approximately $526,000 and $ 440,000 for the years ended October 31, 2008,
and 2009, respectively.
Additionally,
the Company leases office equipment under non-cancelable operating leases which
expired in September of 2009. Total rental expense was $19,000 and
$18,000 for the years ended October 31, 2008, and 2009,
respectively.
Future
minimum lease expenditures under all non-cancelable operating leases at October31, 2009 are as follows:
2010
256,728
2011
256,728
2012
256,728
2013
256,728
2014
256,728
2015
and beyond
299,514
Total
$
1,583,154
F-15
8. Employment
Agreements
The
Company has employment agreements for two key executives. Mr.
Hajost, the Company’s Chief Executive Officer has an executive retention
agreement which obligates the Company to escalating severance payments of up to
one year’s salary in the event Mr. Hajost is terminated without cause, or
terminates his employment with good cause. Mr. Murphy, the Company’s
former Chief Financial Officer, had an amended employment agreement with a term
of 3 years, expiring October 2010 and automatically renewed for additional
one-year terms unless terminated by either the Company or the
employee. Effective November 30, 2009, Mr. Murphy resigned his
positions as Chief Financial Officer and Executive Vice President of the Company
and this employment agreement was terminated
The
aggregate annual minimum commitment under the agreement on October 31, 2009
attributed to Mr. Hajost was $100,000. Due to Mr. Murphy’s
resignation, the Company has no annual minimum commitment under his prior
agreement.
9. Stockholders’
Equity
Stock
On June15, 2009, the Company sold an aggregate of 350,000 shares of its common stock,
to its seven directors, for aggregate cash proceeds of $87,500. The
shares of common stock were sold at $0.25 per share, or $.01 higher than the
closing price of the common stock on the date of sale.
On
October 23, 2009, the Company issued 109,375 shares of its common stock to a law
firm, of which one of the Company’s directors is a member, in conversion of
legal fees due. These legal fees were converted at $ 0.32 per share,
the closing price of our stock on October 23, 2009.
Warrants
On
September 14, 2007, the Company issued 100,000 warrants in exchange for investor
relations services valued at approximately $56,000. The warrants were
issued at an exercise price of $1.28 and expire on September 14,2012. The fair value of the warrants was estimated in four equal
tranches over a four-month vesting period using the Black- Scholes Option
pricing fair value model which resulted in a fair value of $0.62. On
August 24, 2009, the investor relations firm terminated its right to these
100,000 warrants, and in exchange SteelCloud issued to them 115,000 warrants at
an exercise price of $0.20 and vesting immediately. The fair value of
the warrants was estimated using the Black-Scholes Option pricing fair value
model which resulted in a fair value of $0.074.
The
Company recognized $56,000 of sales and marketing expense associated with the
issuance of warrants in exchange for services during the fiscal year ended
October 31, 2008.
As
discussed in Note 6, as an inducement to Caledonia Capital Corporation (the
“Lender”) to make a loan to the Company, the Company issued to the Lender a
warrant to purchase up to 625,000 shares of the Company’s common stock, par
value $0.001 per share. The loan amount of $250,000 was allocated
between the note payable and warrants based upon their respective fair
values. The difference between the face amount of the note of
$250,000 and the note payable amount of $164,425 recorded at the date of
execution represents the debt discount of $85,575 which will be amortized over
the life of the note . The Warrant is exercisable for four years at
an exercise price of $0.15 per share. The Company determined the fair
value of these warrants utilizing the Black-Sholes method. The fair
value of these warrants at issuance date was approximately
$130,000.
F-16
As
discussed above, the Company sold shares of our common stock to our seven
directors. Each share of common stock was accompanied by one warrant
to purchase one additional share of common stock. These warrants are
exercisable for five years from the date of issuance at an exercise price of
$0.25 per share. The seven directors entered into lock-up
agreements with us , restricting their ability to exercise these warrants until
such time as we received shareholder approval for the issuance of these
warrants. We received shareholder approval for the issuance of these
warrants on October 23, 2009.
10. Stock
Based Compensation
Share
-based compensation cost is measured at the grant date, based on the fair value
of the award, and is recognized over the employee’s requisite service
period. Stock-based compensation expense for the year ended October31, 2008 and 2009 increased the Company’s basic and diluted loss per share by
approximately $0.03 and $0.03, respectfully. The estimated fair value
of the Company’s stock-based awards is amortized on a straight-line basis over
the awards’ vesting period.
A summary
of the total stock-based compensation expense for the fiscal years ended October31, 2008 and 2009 is as follows:
Years
ended October 31,
Stock
based expense allocation
2008
2009
Cost
of revenue
$
24,000
$
-
General
and administrative
294,000
199,000
Selling
and marketing
29,000
6,000
Research
and development
21,000
22,000
Severance
and restructuring
-
-
Total
stock compensation
$
368,000
$
227,000
F-17
Stock
Option s
In
January 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Option
Plan”). Under the 1997 Option Plan, options to purchase a maximum of
2,650,000 shares of the Company’s common stock (subject to adjustments in the
event of stock splits, stock dividends, recapitalizations and other capital
adjustments) may be granted to employees, officers and directors of the Company
and certain other persons who provide services to the Company. In
addition, the Company established the 2002 Stock Option Plan (the “2002 Option
Plan”) in May 2002, which permits the Company to grant up to 750,000 options to
employees, officers and directors of the Company and certain other persons who
provide services to the Company under that Plan. In May 2004, the
Company’s shareholders approved an amendment to the Company’s 2002 Stock Option
Plan to increase the number of options available under the plan from 750,000 to
1,500,000. In May 2007, the Company’s shareholders approved the 2007
Stock Option Plan which permits the Company to grant up to 1,500,000 options to
employees, officers and directors of the Company. In May 2008, the
Company’s shareholders approved an amendment to the Company’s 2007 Stock Option
Plan creating the Amended 2007 Stock Option and Restricted Stock Plan (the “2007
Option and Restricted Stock Plan”). The 2007 Stock Option and
Restricted Stock Plan permits the Company to issue restricted stock awards to
employees, officers and directors of the Company in addition to stock option
awards.
Stock
options are generally granted with an exercise price equal to the fair market
value of its common stock at the date of grant. The options vest
ratably over a stated period of time not to exceed four years. The
contractual terms of the options are five or ten years.
The total
options outstanding do not include 600,000 non-qualified options granted to the
former IDP stockholders that are not included in the Option Plan as these
options expired in April 2008.
The
aggregate intrinsic value of options exercised during the fiscal year ended
October 31, 2008 was approximately $93,000. There were no options
exercised during the fiscal year ended October 31, 2009. The
intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option. The
intrinsic value for options outstanding or options exercisable for year ended
October 31, 2009 was $15,000 and $7,500 respectively.
The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing fair value model. This model is
calculated based on exercise price, an expected annual dividend yield of 0% and
several subjective assumptions, including the expected term and expected stock
price volatility over the expected term. The weighted-average
grant-date fair value of options granted during the fiscal years ended October31, 2008 and 2009 was $0.51 and $0.12, respectively.
F-19
The fair
value of the Company’s Stock Option awards granted during the fiscal years ended
October 31, 2008 and 2009 were estimated based upon the following
assumptions:
1
- Expected
term. For awards granted
prior to January 1, 2008 , expected
term for the stock option awards was calculated based upon the simplified method
set out in the SEC Staff Accounting Bulletin No. 107 (“ SAB
107”). For awards granted after January 1, 2008the Company continued
to use the simplified method set out in SAB 107 for grants with two-year and
three-year graded vesting for which it lacked sufficient historical share option
exercise data in accordance with SEC Staff Accounting Bulletin No.
110. Expected term for grants of one year cliff vesting stock option
awards was calculated based upon historical share option exercises for which the
Company did have sufficient historical data.
2
- Expected
stock price volatility. Expected stock price volatility for
Stock Option awards is calculated using the weighted average of the Company’s
historical volatility over the expected term of the award.
3
- Risk-free
interest rate. The risk-free interest rate is calculated
based on the U.S Treasury yield curve on the grant date and the expected term of
the award.
The
Company modified the stock option agreement of one employee in fiscal year
2009. Using the Black-Scholes fair-value pricing model, the fair
value of the stock option agreement prior to modification was approximately
$133,000 and the fair value subsequent to modification was approximately
$164,000. As a result of the modification the Company recorded $44,000 of
stock-based compensation expense which was recorded as general and
administrative expense.
The
Company recognized approximately $364,000 and $86,000 of stock-based
compensation expense associated with stock option awards in the fiscal years
ended October 31, 2008 and 2009, respectively. As of October 31,2009, unrecognized compensation expense related to nonvested stock options was
$15,000 which is expected to be recognized through January 2012 over a weighted
average period of 1.03 years. The total fair value of shares vested
during the years ended October 31, 2008 and 2009 was approximately $309,000 and
$194,000 respectively.
Employee
Stock Purchase Plan – No Participation
In
August, 1998, the Board adopted an Employee Stock Purchase Plan (“ESPP”) whereby
employees may purchase Company stock through a payroll deduction
plan. The purchase price of the stock is the lower of 85% of the fair
market value on the first or last day of the applicable six month offering
period. All employees, including officers but not directors, are
eligible to participate in this plan. Executive officers whose stock
ownership of the Company exceeds five percent of the outstanding common stock
are not eligible to participate in this plan. In May 2007, the
Company’s shareholders approved an amendment to the ESPP that increased the
number of shares available for issuance from 300,000 to 600,000.
The fair
value of each ESPP award is estimated on the date of the grant using the
Black-Scholes option-pricing fair value model. This model is
calculated based on exercise price, an expected annual dividend yield of 0%, the
expected term and a subjective assumption, expected stock price volatility over
the expected term. The Company did not grant any ESPP awards in the
fiscal year ended October 31, 2009. The fair value of the Company’s
ESPP awards granted during the fiscal year ended October 31, 2008 was estimated
based upon the following assumptions:
1
- Expected
term. Expected term for ESPP awards is equal to the vesting
period of the award.
2
- Expected
stock price volatility. Expected stock price volatility for
ESPP awards is calculated using the weighted average of the Company’s historical
volatility over the expected term of the award.
3
- Risk-free
interest rate. The risk-free interest rate is calculated
based on the U.S. Treasury yield curve on the grant date and the expected term
of the award.
F-21
The
Company did not recognize any stock-based compensation expense associated with
ESPP awards in the fiscal year ended October 31, 2009. As of October31, 2009, there was not any unrecognized compensation cost related to ESPP
awards.
Restricted
Stock Awards
Restricted
stock awards are issued pursuant to the Company’s 2007 Stock Option and
Restricted Stock Plan. The Company’s restricted stock grants are
accounted for as equity awards. The expense is based on the price of
the Company’s common stock, and is recognized on a straight-line basis over the
requisite service period. The Company’s restricted stock agreements
do not contain any post-vesting restrictions. The restricted stock
award grants vest ratably over a two to three year period.
A summary
of the Company’s restricted stock award activity as of October 31, 2008 and
2009, and changes during the year then ended are as follows:
The
Company recognized $142,000 of stock-based compensation expense associated with
restricted stock awards in the fiscal year ended October 31,2009. The Company did not recognize any stock-based compensation
expense associated with restricted stock awards in the fiscal year ended October31, 2008. As of October 31, 2009, unrecognized compensation expense
related to nonvested restricted stock awards was $21,000 which is expected to be
recognized through February 2010 over a weighted average period of 0.18
years.
F-22
11. Income Taxes
The
provision for income taxes from continuing operations consists of the
following:
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Components
of the Company’s net deferred tax asset balance are as follows:
As of
October 31, 2009, the Company had approximately $ 48.1 million in pretax net
operating loss carryforwards reported on its tax returns, which expire between
2011 and 2028. Of this amount, approximately 132,000 is unrecognized
in the financial statement related to stock-based compensation that has not yet
provided a benefit due to the Company’s net operating loss
position. The use of the net operating loss carryforwards may be
subject to limitation under the rules regarding a change of ownership as
determined by the Internal Revenue Service. The effects of potential ownership
changes, if any, have not been analyzed by the Company.
The
Company conducts business in the U.S. and is subject to U.S.
taxes. As a result of its business activities, the Company files tax
returns that are subject to examination by the respective federal and state tax
authorities. For income tax returns filed by the Company, the Company
is no longer subject to U.S. federal, or state tax examination by tax
authorities for years before the tax year ended October 31, 2006, although
significant net operating loss carryforward tax attributes that were generated
prior to the tax year ended October 31, 2006 may still be adjusted upon
examination by tax authorities if they either have been or will be
utilized.
As of
November 1, 2008, the Company had a total unrecognized tax benefit of $61
thousand, of which $12 thousand related to tax positions taken in prior years
that did not meet the more-likely-than-not recognition threshold , and $41
thousand related to stock compensation deductions.
The
change in the Company’s unrecognized tax benefits are shown in the table
below:
The
Company has a valuation allowance against the full amount of its net deferred
tax assets and therefore, the amount of unrecognized tax benefits that, if
recognized, would impact the effective tax rate is zero. The
Company does not expect its unrecognized tax benefit liability to change
significantly over the next 12 months. The Company’s accounting
policy is to recognize interest and penalties related to income tax matters in
general and administrative expense. The Company has $0 accrued for
interest and penalties as of October 31, 2008 and 2009.
F-25
12. Earnings
Per Share
Basic net
income per share is computed by dividing net income by the weighted-average
number of common shares outstanding during the period. Diluted net
income per share is computed, using the treasury stock method, as though all
potential common shares that are dilutive were outstanding during the
period. The following table provides a reconciliation of the
numerators and denominators of the basic and diluted computations for net (loss)
per share.
Denominator
for basic earnings per share- weighted-average shares
14,493,215
15,032,286
Effect
of dilutive securities:
Employee
stock options
271,575
20,182
Warrants
56,186
365,644
Restricted
stock
24,160
197,705
Dilutive
potential common shares
351,920
583,531
Denominator
for diluted earnings per share - adjusted weighted-average shares and
assumed conversions
14,493,215
15,615,817
(Loss)
per share from continuing operations, basic and diluted
$
(
0.26
)
$
(0.19
)
Income
(loss) per share from discontinued operations, basic and
diluted
$
0.07
$
(0.05
)
(Loss)
per share, basic and diluted
$
(0.19
)
$
(0.24
)
13. Retirement
Plans
401(k)
Plans
The
Company maintains a 401(k) (the “Plan”) for all current
employees. Under the Plan, employees are eligible to participate the
first calendar day of the month following their first day of service and
attaining the age of 18. Employees could defer up to $ 16,500 of
compensation in calendar year 2009. Employee contributions are
subject to Internal Revenue Service limitations. All employees who
contributed to the Plan are eligible to share in discretionary Company matching
contributions. The Company match is equal to 25 % of employee
contributions up to 6% of an employee’s annual compensation . Company
contributions vest over 5 years. In fiscal 2008 and 2009, the Company
contributed approximately $72,000 and $23,000 to the participants of the 401(k),
respectively.
The
Company is organized on the basis of products and services. The
Company’s chief operating decision maker is the Company’s Chief Executive
Officer. While the Chief Executive Officer is apprised of a variety
of financial metrics and information, the Chief Executive Officer makes
decisions regarding how to allocate resources and assess performance based on a
single operating segment .
15. Related
Party Transactions.
An
individual who is a director is also a founding member of Gersten Savage LLP,
who provides legal services to the Company. During the fiscal years
ended October 31, 2008 and 2009, the Company paid Gersten Savage LLP
approximately $ 93,000 and $ 169,000, respectively, in legal fees.
In addition, on October 23, 2009, we issued 109,375 shares of our
common stock to Gersten Savage LLP in conversion of legal fees due
them. These legal fees were converted at $0.32 per share, the closing
price of our stock on October 23, 2009.
16. Commitments
and Contingencies
The
Company has accrued approximately $ 50,000 pertaining to non-income taxes and
related interest and penalties that would have resulted from the failure to file
the associated returns. The Company intends to file the necessary
returns to resolve the contingency.
On
February 2, 2010, SteelCloud entered into a Lease Agreement (the “February
Lease”) with Merritt-AB5, LLC (the “Landlord”), pursuant to which SteelCloud
will rent approximately 3,461 square feet in the property located at 20110
Ashbrook Place, Suite 130, Ashburn, Virginia20147 (the “Premises”) for its
operations facility. The term of the February Lease is for one year
beginning on the later to occur of (i) February 15, 2010, (ii) the date the
Landlord completes certain work on the premises, or (iii) the date when we
occupy the Premises (the “Term”). The Term may be extended for
two additional successive one year periods. The monthly rate is
$6,489.38, or $77,872.50 for the first year, inclusive of operating
expenses. If we determine to extend the term, the monthly rent for
the second year will be $6,684.06 or $80,208.68 per year, and the monthly rent
for the third year will be $6,884.58 or $82,614.94 per year.
Sale
of Portion of Consulting Business
On
January 11, 2010, SteelCloud entered into a Purchase and Sale Agreement (the
“Agreement”) with Global Technology Partners, Inc., a Maryland Corporation (the
“Purchaser”).
Pursuant
to the Agreement, on January 15, 2010, SteelCloud sold to the Purchaser a
portion of its consulting business, consisting of certain consulting contracts
and related agreements, and assign all of its rights to employment and
independent contractor contracts for certain of its contractors and employees
engaged in the consulting business (the “Assets”). As consideration
for the sale of the Assets, the Purchaser agreed to pay a base price of one
hundred forty thousand dollars ($140,000) (the “Base Price”) of which (a)
seventy thousand dollars ($70,000) was paid upon the execution of the Agreement,
and (b) seventy thousand dollars ($70,000) was paid on January 15, 2010;
however, this payment may be forfeited to Purchaser if a novation is not
approved by the government and certain payments due to Purchaser from the Assets
are not made to Purchaser. In addition to the Base Price, the
Agreement provides for contingent payments in the amount of (a) one hundred
thousand dollars ($100,000) in the event certain payments are made pursuant to
certain of the Assets, and (b) twenty percent (20%) of the gross margin from all
revenue generated from the Assets for the period beginning from January 11, 2010
and ending on January 11, 2011.
F-28
Pursuant
to the Agreement, the parties agreed to cooperate in obtaining novations of all
governmental contracts included in the Assets. SteelCloud agreed to
guarantee payment of all liabilities and the performance of all obligations that
Purchaser assumed under any governmental contracts included in the
Assets.
The
Agreement contains standard representations and warranties for a transaction of
this type. The terms of the transaction were the result of arm’s length
negotiations between SteelCloud and the Purchaser. Prior to the
completion of the transaction, neither SteelCloud nor any of its affiliates or
officers, directors or their associates had any material relationship with the
Purchaser, other than in respect of the Agreement and the transactions
contemplated therein and related thereto.
In
connection with the Agreement, SteelCloud obtained a Release of Lien (the
“Release”) from Caledonia Capital Corporation (“Caledonia”), pursuant to which
Caledonia released and waived its interest in the Assets, including any
receivables due thereunder, which SteelCloud pledged and assigned as collateral
security under the Line of Credit and Security Agreement dated November 3, 2009,
by and between SteelCloud and Caledonia (the “Line of Credit”).
NASDAQ
Stock Market Delisting
On
January 5, 2010, the Company received notice from The NASDAQ Stock Market
("NASDAQ") indicating that the NASDAQ Hearings Panel determined to delist the
Company’s securities from NASDAQ and trading in the Company’s securities would
be suspended effective as of the open of trading on Thursday, January 7, 2010.
As previously reported by the Company, on October 8, 2009, the NASDAQ Hearings
Panel gave SteelCloud until January 4, 2010 to comply with NASDAQ Listing Rule
5550(b) (formerly known as Market Place Rule 4310(c)(3)), which required that
the Company maintain a minimum of (a) $2,500,000 in stockholder' s equity, (b)
$35,000,000 market value of listed Securities, or (c) $500,000 of net income
from continuing operations . the Company was unable to gain compliance with
NASDAQ Listing Rule 5550(b) by the January 4, 2010 deadline. The Company does
not intend to take any further action to appeal NASDAQ's decision. Accordingly,
trading of the Company’s common stock was suspended at the opening of business
on January 7, 2010, and NASDAQ will file a Form 25-NSE with the SEC as soon as
all applicable appeal periods have lapsed.
Allonge
to Business Loan
On
December 29, 2009, the Company entered into an Allonge to Note (the "Allonge")
with Caledonia Capital Corporation, a Delaware Corporation (the "Lender"). The
Allonge amends the terms of the Business Loan and Security Agreement dated July1, 2009 (the "Agreement"), pursuant to which the Lender agreed to lend to the
Company $250,000 in the form of a Secured Promissory Note (the "Note") issued on
July 1, 2009. The Note originally provided for a maturity date of December 29,2009 (the "Maturity Date") and an annual interest rate of 15%. The Allonge
amends the Note by, among other things, (a) increasing the annual interest rate
of the Note to 20%, (b) providing that accrued interest under the Note shall be
payable in monthly installments commencing on February 1, 2010, and continuing
on the first business day of each successive month, (c) paying an extension fee
of $25,000 and (d) extending the Maturity Date of the Note to March 31, 2010.
There are no penalties for early prepayment of the Note.
On
November 3, 2009, the Company entered into a Line of Credit and Security
Agreement (the "Agreement") with Caledonia Capital Corporation, a Delaware
corporation (the "Lender") pursuant to which the Lender agreed to extend to the
Company a revolving line of credit in the amount of $150,000, in the form of a
Revolving Line of Credit Promissory Note (the "Note"). The Note bears interest
at a rate of 15% per annum, and is payable in monthly installments commencing 30
days after SteelCloud issued the Note (November 3, 2009). The principal amount
of the Note, together with interest accrued and unpaid thereon and all other
sums due, shall be due and payable in full upon the earlier to occur of (a)
March 31, 2010, or (b) the date the Company shall have raised a total of not
less than $1,000,000 in capital invested in the equity of the Company which is
accompanied by the Company issuing shares of stock which were not trading in the
public markets prior to the date of the Note ("New Equity Capital"). There are
no penalties for early prepayment of the Note. The Note is a
revolving line of credit note. Principal advances may be made, from time to
time, by the Lender up to the principal amount of the Note, and principal
payments may be made, from time to time by the Company to reduce the principal
balance owing pursuant to the Note.
Pursuant
to the Agreement and the Note, the Company ' s obligations thereunder are
secured by a lien in and to all of the Company’s rights, title and interest in
and to its furniture, fixtures, equipment, supplies, receivables, intangibles,
and inventory, together with all present and future substitutions, replacements
and accessories thereto and all present and future proceeds and products
thereof, in any form whatsoever (the "Collateral").
As an
inducement to the Lender to make a loan under the Agreement, the Company shall
issue to the Lender a warrant (the "Warrant") to purchase 2.5 shares of the
Company' s common stock, par value $0.001 per share ("Common Stock") for every
dollar the Company borrows pursuant to the Agreement. The Warrant is exercisable
for four years at an exercise price of $0.25 per share. The exercise price may
be adjusted in the event of any stock dividend, stock split, stock combination,
reclassification or similar transaction. Additionally, the Company's Board of
Directors (the "Board") has the discretion to reduce the then-current exercise
price to any amount at any time during the term of the Warrant for any period of
time the Board deems appropriate. The Company has agreed to prepare and file a
registration statement for the purposes of registering the resale of the shares
of Common Stock underlying the Warrant, commencing on or about December 31,2009.
F-31
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain
statements contained herein may constitute forward-looking
statements. Because such statements include risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results
to differ materially include, but are not limited to, our ability to obtain
financing in the short term, risks associated with the integration of businesses
following an acquisition, concentration of revenue from one source, competitors
with broader product lines and greater resources, emergence into new markets,
the termination of any of our significant contracts or partnerships, our
inability to maintain working capital requirements to fund future operations or
our inability to attract and retain highly qualified management, technical and
sales personnel.
You
should read the following discussion and analysis in conjunction with the
audited Financial Statements and Footnotes attached thereto, and the other
financial information appearing elsewhere in this prospectus.
OVERVIEW
Founded
in 1987, we are a developer of mobility appliance software solutions primarily
for the Research In Motion® (referred to herein as “RIM”) BlackBerry
market. We design and integrate our software into specialized server
appliances targeted at the Federal Government and in particular the United
States Department of Defense (referred to herein as “DoD”), public sector,
commercial, and BlackBerry hosting service providers.
We
designed and developed SteelWorks, a line of appliances built to enhance the
BlackBerry Enterprise Server (referred to herein as“BES”). Currently,
there are approximately 250,000 instances of BES installed
worldwide. Our SteelWorks appliances provide quick and simple
installation as well as additional features that increase the reliability and
supportability of BES. Our SteelWorks FedMobile appliances are built
specifically for DoD customers and contractors that are required to implement
the Defense Information Systems Agency ( the “DISA”) Security Technical
Information Guides (“STIGs”). SteelWorks FedMobile productizes the DISA
STIGs necessary to implement BES on DoD’s “.mil” network. Instead of
requiring weeks of highly technical configuration work, a DoD customer can
install SteelWorks FedMobile and have their
STIG-compliant BES environment installed in as little as 60
minutes.
During
the 2009 fiscal year, we realized our revenue from computer integration
products, BlackBerry-related products, and consulting services. In
our computer integration business, we designed and integrated customized
computers for federal government customers, federal integrators, and commercial
technology companies. On July 10, 2009, we sold our computer
integration business to NCS Technologies, Inc. (referred to herein as
“NCS”). Please see “Business – Recent Developments -
July 2009 Sale of Integration Business” for additional
information. In our consulting services business, we provide
general technical consulting and project management and BlackBerry-related
consulting services primarily to federal government customers. On
January 11, 2010, we sold the portion of our consulting services business that
was non-BlackBerry related to Global Technology Partners, Inc., a Maryland
Corporation (referred to herein as “GTP”). Please see “Business-Recent Developments -
January 2010 Sale of Certain Professional Services Assets” for additional
information. With the consummation of the sales to NCS and GTP, we
have focused our business specifically on the mobility-related
market.
Over
the last five fiscal quarters, we have significantly changed our business and
refined our focus. As described above, we have sold businesses and
sources of revenue in order to permit us to focus on our high margin
intellectual property software assets. The result is the creation of
a smaller, and what we believe to be, a more focused company. Neither
the computer integration business nor the consulting services business that were
sold contributed to either positive GAAP earnings or positive cash flow, and as
a result, the sale of these businesses is not expected to have a negative
impact on our cash position going forward. Over the last
five quarters, with the sales of these operations and other cost cutting
measures that we have undertaken, we have reduced our cash burn rate by
approximately 75% and our revenue breakeven point by over 80%.
Currently,
we operate in three markets – the commercial enterprise market, the DoD market,
and the BlackBerry international hosting market. We have entered into
various partnerships and channels to address these markets, including (a) an
agreement with CDW/CDW-G to resell our SteelWorks appliances to commercial and
DoD customers, and (b) an agreement to make our products available through
Ingram Micro to commercial and DoD customers, as well as to resellers and value
added resellers. Further, we entered into an original equipment
manufacturer agreement with Dell in June 2009 to manufacture and support our
SteelWorks appliance hardware which has significantly reduced the cost and
complexity of our operations and has allowed us to focus our resources on
SteelWorks software intellectual property.
Over
the last fiscal year, we have developed and released new versions of our
commercial and DoD appliances for the latest BES 5.0 technology. As
described above, we have agreements in place with suppliers and distributors for
our appliance products. We also have our worldwide agreements in
place for the distribution of BES hosted licenses. Based on our
current mobility focus, with our products being developed and shipped, and our
supplier and distribution channels in place and growing, we believe that we are
in a significantly better position to become profitable.
24
However,
we continue to face significant risks. Our products, revenues, and
our ability to continue as a going concern are highly dependent on the success
of RIM and specifically BlackBerry products. In several areas of our
business, we are dependent on RIM agreements. Our business would be
negatively impacted if these agreements are cancelled or are not
renewed. We are also dependent on a few larger suppliers, resellers
and partners. Further, our lack of financial resources have precluded
us for marketing our products as aggressively as we think would be
beneficial. As of October 31, 2009 and March 11, 2010, we did not
have the capital necessary to ensure that we can continue as a going
concern.
Revenue
Recognition
We
recognize revenue when the following four basic criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services
rendered; (3) the fee is fixed and determinable; and (4) collectability is
reasonably assured.
In the
event we enter into a multiple element arrangement and there are undelivered
elements as of the balance sheet date, we assess whether the elements are
separable and have determinable fair value in determining the amount of revenue
to record.
We derive
our revenue from the following sources: product sales, information technology
support services, software license as a reseller and support sales and software
training and implementation services.
For
product sales where title transfers upon shipment and risk of loss transfers to
our customer, we generally recognize revenue at the time of
shipment. For product sales where title and risk of loss transfers
upon destination, we generally recognize revenue when products reach their
destination. Revenue from hardware leased to customers under
operating lease arrangements is recognized over the contract
term. When product and installation services that are not essential
to the functionality of the product are sold as part of a bundled agreement, the
fair value of the installation services, based on the price charged for the
services when sold separately, is deferred and recognized when the services are
performed. The products sold are generally covered by a warranty
ranging from one to three years. We previously accrued an estimated
warranty reserve in the period of sale to provide for estimated costs to provide
warranty services; as part of the agreement with Dell to produce our appliance
hardware, we currently purchase an on-site three year warranty from Dell with
each unit. This warranty is transferred to the appliance end user and
warranty service is provided directly to the customer by Dell.
25
When we
act as a reseller, we monitor the terms of each new transaction to assess
whether ASC 605-45, “Reporting Revenue Gross as a Principal versus Net as an
Agent” applies to our financial reporting for such transaction. In
accordance with this standard, we recognize revenue associated with the resale
of service contracts on a gross basis.
In
October 2008 we began delivering our appliance solution specifically developed
for Blackberry Enterprise Servers, referred to herein as “BES”. Our
software does not require significant modification and customization
services. We do not have vendor-specific objective evidence (“VSOE”)
of fair value for our software. Accordingly, when the software is
sold in conjunction with our hardware, software revenue is recognized upon
delivery of the hardware.
For
services revenue under time and material contracts, we recognize revenue as
services are provided based on the hours of service at stated contractual
rates.
We incur
shipping and handling costs, which are recorded in cost of
revenues.
Typically
our deferred revenue includes amounts received from customers for which revenue
has not been recognized. This generally results from certain customer
contracts, ISV releases, warranties, hardware maintenance and support, and
consulting services. The deferred revenue associated with customer
contracts and ISV releases represents payments received for milestones achieved
prior to recognition of revenue. This revenue will be recognized as
products are shipped. Revenues from warranties and hardware
maintenance and support are recognized ratably over the service term selected by
the customer. Deferred service revenues from consulting are
recognized as the services are performed.
Equity-Based
Compensation
Share-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized over the employee’s requisite service
period. The fair value of the stock options and employee stock
purchase plan (“ESPP”) awards are estimated using a Black-Scholes option
valuation model. This model requires the input of highly subjective
assumptions and elections, including expected stock price volatility and the
estimated life of each award. The fair value of equity-based awards
is amortized over the vesting period of the award and we have elected to use the
straight-line method for amortizing our stock option and ESPP
awards.
Income
Taxes
We
recognize deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of certain assets and liabilities. A valuation allowance is
established, as necessary, to reduce deferred income tax assets to an amount
expected to be realized in future periods. We determine our valuation
allowance by weighing all positive and negative evidence including past
operating results and forecasts of future taxable income. In
assessing the amount of the valuation allowance as of October 31, 2008 and 2009,
we considered, in particular, our forecasted taxable income for the upcoming
fiscal year, current backlog of orders, including those recently received, and
other significant opportunities currently in our sales and marketing pipeline
with a high probability of generating revenues. Based upon this
review, we have continued to fully reserve for all deferred tax assets as of
October 31, 2009.
We
account for uncertainty in income taxes using a more-likely-than-not recognition
threshold based on the technical merits of the tax position
taken. Tax positions that meet the more-likely-than-not recognition
threshold should be measured as the largest amount of the tax benefits,
determined on a cumulative probability basis, which is more likely than not to
be realized upon effective settlement in the financial statements.
Our accounting policy is to recognize interest and penalties related to income
tax matters in general and administrative expense.
Inventory
Inventory
consists of materials and components used in the assembly of our products or
maintained to support maintenance and warranty obligations and are stated at the
lower of cost or market using actual costs on a first-in, first-out
basis. We maintain a perpetual inventory system and continuously
record the quantity on-hand and actual cost for each product, including
purchased components, subassemblies and finished goods. We maintain
the integrity of perpetual inventory records through periodic physical counts of
quantities on hand. Finished goods are reported as inventory until
the point of title transfer to the customer. Generally, title
transfer is documented in the terms of sale. When the terms of sale
do not specify, we assume title transfers when it completes physical transfer of
the products to the freight carrier unless other customer practices
prevail.
We
periodically evaluate our inventory obsolescence to ensure inventory is recorded
at its net realizable value . Our policy is to assess the valuation
of all inventories, including manufacturing raw materials, work-in-process,
finished goods and spare parts in each reporting period. Inherent in
managements estimates of excess and obsolete inventory are management’s
forecasts related to our future manufacturing schedules, customer demand,
technological and/or market obsolescence and possible alternative
uses. If future customer demand or market conditions are less
favorable than our projections, additional inventory write-downs may be
required, and would be reflected in cost of sales in the period the revision is
made.
As part
of the agreement with Dell to produce our appliance hardware, we purchase an
on-site three year warranty from Dell with each unit. This warranty
is transferred to the appliance end user and warranty service is provided
directly to the customer by Dell.
Warranty
and service support for BlackBerry software is provided directly to the user by
RIM as part of the software license agreement. End users contact RIM
directly for support.
We
periodically monitor the performance and cost of warranty activities for other
technology that we develop.
Segment
Reporting
We are
organized on the basis of products and services. Our chief operating
decision maker is our Chief Executive Officer. While the Chief
Executive Officer is apprised of a variety of financial metrics and information,
the Chief Executive Officer makes decisions regarding how to allocate resources
and assess performance based on a single operating segment.
Recently
Issued Accounting Pronouncements
In
September 2009, Financial Accounting Standards Board (“FASB”) issued ASC 605-25,
Revenue Recognition -
Multiple-Deliverable Revenue Arrangements, formerly Emerging Issues Task
Force (EITF) 00-21 .
This guidance addresses how to separate deliverables and 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 after December 15, 2009 but may be early adopted as
of the beginning of an annual period. We are currently evaluating the effect
that this guidance will have on our financial position and results of
operations.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162, now referred to as ASC 105-10,
Generally Accepted Accounting
Principles . The FASB Accounting Standards Codification (“Codification”)
will become the source of authoritative U.S. generally accepted accounting
principles (“GAAP”) recognized by FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of this statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. This statement is effective for financial
statements issued for interim and annual periods ending after September 30,2009. The adoption of this statement did not have a material effect
on our financial statements.
In June
2009, the FASB issued SFAS No. 165, later codified in ASC
855-10, Subsequent
Events . ASC 855-10 establishes general standards of for the evaluation,
recognition and disclosure of events and transactions that occur after the
balance sheet date. Although there is new terminology, the standard is based on
the same principles as those that currently exist in the auditing standards. The
standard, which includes a new required disclosure of the date through which an
entity has evaluated subsequent events, is effective for interim or annual
periods ending after June 15, 2009. The adoption of ASC 855-10 did
not have a material effect on our financial statements.
In April
2009, the FASB issued FASB Staff Position No. 107-1 and APB Opinion No. 28-1
(FSP 107-1 and APB 28-1), later codified in ASC 825-10-65-1, Interim Disclosures about Fair Value
of Financial Instruments . FSP 107-1 and APB 28-1 require fair value
disclosures in both interim, as well as annual, financial statements in order to
provide more timely information about the effects of current market conditions
on financial instruments. FSP 107-1 and APB 28-1 became effective for us in the
quarter ended July 31, 2009, and our adoption of FSP 107-1 and APB
28-1 did not have a material impact on our financial statements.
In June
2008, the EITF ratified EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock , now referred
to as ASC 815-40-15. ASC 815-40-15 provides guidance in assessing whether
derivative instruments meet the criteria in paragraph 11(a) of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities , now referred to as ASC 815, for
being considered indexed to an entity’s own common stock. ASC 815-40-15 is
effective for fiscal years beginning after December 15, 2008. The adoption of
this statement is not expected to have a material effect on our financial
statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets , now referred to as FASB ASC 350-30-65-1. It amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, Goodwill
and Intangible Assets , now referred to as ASC 350. ASC 350-30-65-1 is
effective for fiscal years beginning after December 15, 2008 and may not be
adopted early. The adoption of this statement is not expected to have a material
effect on our financial statements.
27
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133, now referred to as ASC 815 . ASC 815 is intended to
improve financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. ASC 815 is effective for financial statements issued for
fiscal years beginning after November 15, 2008, with early adoption encouraged.
The adoption of this statement is not expected to have a material effect on our
financial statements.
In
December 2007, the FASB issued SFAS No.141R, Business Combinations , now
referred to as ASC 805 . ASC 805 establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate and financial effects of
the business combination. The guidance will become effective for the
fiscal year beginning after December 15, 2008. The adoption of this statement is
not expected to have a material effect on our consolidated financial statements,
unless we enter into a material business combination transaction. We are in the
process of evaluating the effect, if any, the adoption of ASC 805 will have on
our financial statements, if we undertake an acquisition.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51 , now
referred to as ASC 810. ASC 810 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective for the fiscal year beginning
after December 15, 2008. We are in the process of evaluating the effect, if any,
the adoption of ASC 810 will have on our financial statements.
In the
third quarter of fiscal year 2009 we discontinued the operations of our hardware
integration business. The following discussions pertain solely to our
continuing operations and discontinued operations are discussed
separately.
Net
Revenue Discussion
The
following table summarizes our net revenue for the twelve months ended October31, 2008 and 2009 in dollars and as a percentage of net revenues.
The
decrease in product revenue is primarily attributable to the sale of the
hardware integration business. Given the new focus of our business
during the twelve months ended October 31, 2009, we do not anticipate a
significant portion of our revenues to be generated from ancillary technology
products that are not focused around the SteelWorks product line; however, we
will continue to support our existing customers and may sell products outside of
our SteelWorks product line from time to time.
The
decrease in service revenue for the twelve months ended October31, 2009 as compared to the same period in fiscal 2008 is the result of our
completing a large services contract in December 2008, as there were no revenues
in fiscal 2009 from January, 2009 through October, 2009.
Gross
Profit Discussion
The
following table summarizes our gross profit for the twelve months ended October31, 2008 and 2009 in dollars, as a percentage of gross profit and as a
percentage of net revenues.
The
significant increase in products gross profit percentage for the twelve months
ended October 31, 2009 as compared to the same period in fiscal year 2008 is the
result of our SteelWorks sales, a product that was launched in early fiscal year
2009. Given the significant intellectual property and software we
have created and developed for this product, we anticipate margins will remain
strong in future periods.
The
increase in services gross profit for the twelve months ended October 31, 2009
as compared to the same period in fiscal year 2008 is primarily attributable to
the completion of a low margin services contract in December 2008.
Operating
Expense Discussion
The
following table summarizes our operating expenses for the twelve months ended
October 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
The
decrease in selling and marketing expense is the result of aligning expenses to
our current and future business models to focus on our SteelWorks products. For
the twelve months ended October 31, 2009 compared to the twelve months ended
October 31, 2008, marketing activities and expense associated with selling and
marketing personnel decreased as a result of cost cutting efforts. We
anticipate our sales and marketing costs will increase in future periods in
order to create demand for our new products.
The
research and product development expense for the twelve months ended October 31,2009 slightly decreased compared to the twelve months ended October 31,2008. We continue to make research and development investment into
our SteelWorks family of products. We anticipate that these research
and development costs will continue in future periods.
The
decrease in general and administrative expenses for the twelve months ended
October 31, 2009 compared to the twelve months ended October 31, 2008 is
primarily attributable to a reduction in operating costs resulting from the sale
of our hardware integration business was complete. Furthermore, we
have significantly reduced our operating expenses from the prior year
specifically relating to rent, personnel, insurance and other corporate
costs.
The
increase in our severance and restructuring costs is primarily attributable to a
severance agreement with our former President and Chief Executive
Officer.
31
Other
Income (Expense) Discussion
The
following table summarizes our other income (expense) for the twelve months
ended October 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
The
decrease in other income/(expense) is attributable to increased interest expense
relating to the Caledonia Capital Corporation loan which had an annual interest
rate of 15% per year. In addition, we have accrued interest
associated with our settlement with our former landlord on May 22, 2009 at an
annual rate of 18%.
Income
Tax (Benefit)
The
following table summarizes our income tax benefit for the twelve months ended
October 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
In the
twelve months ended October 31, 2008 we recorded an income tax expense
attributable to discontinued operations and income tax benefit on continuing
operations in accordance with intraperiod tax allocation rules. As
both discontinued operations and operations had a loss in fiscal year 2009, no
such allocation was made.
32
Loss
from Continuing Operations Discussion
The
following table summarizes our loss from continuing operations for the twelve
months ended October 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
The
decrease in loss from continuing operations for the twelve months ended October31, 2009 as compared to the same period in fiscal 2008 was attributable to the
reduction of sales of products not pertaining to the discontinued operations and
completion of a service contract in December 2008, as well as lower cost of
revenue and lower operating expenses as a result of our shift in emphasis to
BlackBerry related products and technologies.
Income
(loss) from Discontinued Operations Discussion
The
following table summarizes our income (loss) from discontinued operations for
the twelve months ended October 31, 2008 and 2009 in dollars and as a percentage
of net revenues.
The loss
for the twelve month period ended October 31, 2009 as compared to the same
period in 2008, is attributable to discontinued operations, overall downward
economic climate, contract delays, non-renewals and order constriction in our
commercial business.
As a
result of the continuing declines in revenues as well as the cumulative losses,
we determined to discontinue our hardware integration business in the third
quarter of our 2009 fiscal year.
Liquidity
and Capital Resources
We have
experienced recurring losses from operations and negative cash
flows. For the twelve months ended October 31, 2009, we incurred a
net loss of $3,736,562 and an accumulated deficit of $48,605,126 as of that
date. The report from our independent registered public accounting
firm on our audited financial statements at October 31, 2009 contains an
explanatory paragraph regarding doubt as to our ability to continue as a going
concern as a result of our history of net losses from operations , net working
capital deficit and uncertainty regarding our ability to satisfy
obligations as they become due in the near future . Despite our
history of revenues, we can give no assurance that we will be able to maintain
or increase our revenues in fiscal 2010 or that we will be successful in
reaching profitability or generating positive cash flows from our
operations. We are considering all strategic options to improve our
liquidity and obtain working capital to fund our continuing business
operations including equity offerings, asset sales and debt financing as
alternatives to improve our cash needs; however; we can offer no assurance that
we will be successful in identifying, obtaining or negotiating financing
terms. If adequate funds are not available or are not available on
terms acceptable to us, we will likely not be able to take advantage of
unanticipated opportunities, develop or enhance services or products, respond to
competitive pressures, or continue as a going concern.
Our
consolidated financial statements do not give effect to any adjustments to
recorded amounts and their classifications, which would be necessary should we
be unable to continue as a going concern and therefore, be required to realize
our assets and discharge our liabilities in other than the normal course of
business and at amounts different from those reflected in the consolidated
financial statements.
As of
March 11, 2010, we had approximately $35,000 cash on hand, which is adequate for
less than one month of operations. As such, we rely on the cash
generated from ongoing operations to fund our operations. For the
month of February 2010, we used approximately $215,000 of cash while we
generated approximately $202,000 from ongoing activities. For fiscal
year 2010 through February 28, 2010, we have used approximately $36,000 of
cash. Because we are not yet able to cover our operational expenses
from our operational revenues, we are reliant on external sources of liquidity
in order to continue our operations and properly execute our business
plan. We are exploring all available funding sources, including a
capital investment from an existing shareholder. Further, we are
engaged in discussions with other strategic partners to explore alternative
funding methods in the event that the offering being made pursuant to this
prospectus does not raise sufficient funding.
We do not
have any working capital commitments nor do we presently have any external
sources of working capital. Historically, our revenues have not been sufficient
to fund our operations and we have relied on capital provided through the sale
of equity securities. Our working capital needs in future periods
will depend primarily on the rate at which we can increase our revenues while
controlling our expenses and decreasing the use of cash from operations
..
34
For the
twelve months ended October 31, 2009, we used approximately $1,578,000 in cash
from operating activities. Our primary use of cash was to finance our operating
loss. The use and availability of our cash is affected by the timing,
pricing, and magnitude of orders for our products, and the timing of cash
outflows relating to these orders.
We
generated approximately $ 564,000 from our investing activities and $322,000 in
financing activities for the twelve months ended October 31, 2009.
Our
consolidated financial statements for the twelve months ended October 31, 2009
do not give effect to any adjustments to recorded amounts and their
classifications, which would be necessary should we be unable to continue as a
going concern and therefore, be required to realize our assets and discharge our
liabilities in other than the normal course of business and at amounts different
from those reflected in the consolidated financial statements.
Off-Balance
Sheet Arrangements
Contractual
Obligations and Commercial Commitments
We had
significant contractual obligations for fiscal year ended October 31, 2009 and
beyond for our operating leases and employment agreements.
On
February 27, 2009, we entered into a lease amendment with the landlord of our
operation facility whereby the current lease, which was scheduled to expire on
August 31, 2014, has been amended to provide for (i) the extension of the lease
term for a period of one (1) year and four (4) months ending on December 31,2015, and (ii) certain other modifications, including a reduction in our rent
cash payments by approximately $60,000 and $34,000 for the fiscal years 2009 and
2010, respectively. Our monthly straight-line rent expense will be
approximately $21,000 a month for the length of the lease.
On May22, 2009, we entered into a Stipulation /Consent Order with CRP (referred to
herein as the “Stipulation”) , pursuant to an Affidavit and Statement of Account
(referred to herein as the “Affidavit”) , stating, as declared by a general
manager of Jones Lang LaSalle, a property management company and agent for CRP
Holdings A-1, LLC (referred to herein as “CRP”) , the landlord of 14040 Park
Center Road, Suite 210, Herndon, Virginia20171 (referred to herein as the “
Premises ”) , that CRP, as landlord, was seeking a judgment against us for: (i)
possession of the Premises, and (ii) monetary damages for nonpayment of rent due
under a sublease , dated September 28, 2004, by and between us and NEC America,
Inc. (referred to herein as “NEC”) (referred to herein as the “Sublease”) , and
a subsequent assignment of the Sublease to CRP from NEC, dated December 15,2008. In the Stipulation we acknowledged that the balance due for
rent and additional rent for the Premises was $168,638, together with attorney’s
fees and court expenses of $7,041 through May 22, 2009 (referred to herein as
the “Judgment Amount”). Pursuant to the Stipulation, we paid $30,000
(referred to herein as the “ Forbearance Payment ”) on May 22, 2009 toward the
Judgment Amount. Further we agreed to, and have, vacated the
Premises. CRP agreed to stay enforcement of the Judgment Amount until
the earlier of (a) our receipt of capital in the amount of at least $500,000, or
(b) May 31, 2010. The matter was returned to the court’s files
pending our compliance with the terms of the Stipulation.
On
February 5, 2009, we entered into an Executive Retention Agreement (the “2009
Agreement”) with Brian Hajost, our current President and Chief Executive
Officer, effective as of January 16, 2009. Pursuant to the terms of
the 2009 Agreement, as compensation for Mr. Hajost serving as our President and
Chief Executive Officer, Mr. Hajost receives (a) a semi-monthly salary of
$8,333.33 (or $200,000 annually); (b) a stock grant of 156,000 shares of our
common stock, which will vest ratably over 12 months; and (c) a stock option
grant of 300,000 shares of our common stock, which will vest ratably over a
three year term and have a five year exercise period. The 2009
Agreement further provides that in the event we terminate Mr. Hajost’s
employment without cause (other than due to Mr. Hajost’s request), or if Mr.
Hajost terminates his employment for good reason, Mr. Hajost will be entitled to
12 months salary. In the event that a majority of our stock or a
substantial portion of our assets are acquired, the acquisition closes while Mr.
Hajost is employed by us, and Mr. Hajost’s employment with us is terminated
without cause (other than due to Mr. Hajost’s request) within 30 days of the
acquisition, Mr. Hajost will be entitled to severance pay equal to the lesser of
(a) 24 months salary based on his annual rate of pay for the calendar year
before the calendar year of termination from service, or (b) two times the IRS
limit for qualified plans provided for in 26 U.S.C. § 401(a)(17) for the
calendar year of termination of service.
We do not
have any purchase obligations, capital lease obligations or any material
commitments for capital expenditures. We have not engaged in
off-balance sheet financing, commodity contract trading or significant related
party transactions.
35
Impact
of Inflation
We do not
believe that inflation has had a material effect on our financial position or
results of operations during the past three years. However, we cannot
predict the future effects of inflation.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
were no changes in and disagreements with accountants on accounting and
financial issues during our two last fiscal years or any subsequent interim
period.
DIRECTORS
AND EXECUTIVE OFFICERS
The name,
age and position of each of our directors and executive officers are as
follows:
Name
Age
Position
Brian
H. Hajost
53
President
and Chief Executive Officer and Director
Steven
Snyder
50
Vice
President of Finance, Principal Financial Officer and
Secretary
James
Bruno
74
Director
VADM
E. A. Burkhalter, Jr. USN
81
Director
Jay
Kaplowitz
63
Director
Ashok
Kaveeshwar
68
Director
Benjamin
Krieger
72
Director
Brian H.
Hajost has served as our Chief Executive Officer, President and a member
of the Board since February 2009. From February 2007 until June 2008, Mr. Hajost
served as Executive Vice President of Cryptek, Inc. Mr. Hajost served as our
Chief Operating Officer from December 2003 until June 2006 and President from
June 2005 until June 2006. Prior to December 2003, he served as our Executive
Vice President of Sales & Marketing from June 2001 until his promotion to
the Chief Operating Officer position in 2003. Mr. Hajost also founded two
consulting companies in 2006 and 2008.
Steven
Snyder has served as our Vice President of Finance and Principal
Financial Officer since November 2009. Since April 2009, Mr. Snyder
has served as the owner of a general business and financial consulting and
software development company. From September 2000 to February 2009,
Mr. Snyder served as the Vice President of Finance of The Richards Corporation,
a privately owned supplier of both aircraft galley equipment used in corporate
and commercial aviation, and imagery analysis workstations designed to meet a
wide range of aerial surveillance applications used in the United States and by
various governments. During his tenure at The Richards Corporation,
Mr. Snyder also simultaneously served as the Vice President of Information
Technology, Operations and Materials Management. From 1984 to 2000,
Mr. Snyder worked for a number of corporate entities in a variety of financial
and operational roles. From 1981 to 1984, Mr. Snyder worked for
Arthur Andersen and Co. where he became a Certified Public Accountant.
He obtained his Bachelor of Science degree in Accounting from the
State University of New York in 1981.
James
Bruno has served as our director since September 2000. Mr.
Bruno has served as a member of the Audit Committee of our Board of Directors
since January 2004. Mr. Bruno was formerly President of Syntrex
Corporation, prior to which he served as President of the Computer Division of
Perkin Elmer Corporation. He had formerly served in various
management positions with Electronic Associates, Inc. Mr. Bruno has
extensive experience in the computer industry, as well as corporate
acquisitions. He served as a consultant to SteelCloud, Inc. in 1997
and 1998.
Vice Admiral E.
A. Burkhalter, Jr., USN (Ret.)
has served as
our director since January 1997. In July 2006, Mr. Burkhalter was
appointed Chairman of our Board of Directors. Mr. Burkhalter has
served as a member of each of the Audit Committee, Executive Committee and the
Compensation Committee of our Board of Directors since January
2004. Mr. Burkhalter is currently the President of Burkhalter
Associates, Inc., a consulting firm providing services in the areas of
international and domestic strategy, management policy and technology
applications, for both government and industry. Mr. Burkhalter spent
40 years as a member of the United States Navy, during which time he held
several positions, including Director of Strategic Operations for the Chairman
of the Joint Chiefs of Staff. He is currently a member of the Defense
Intelligence Agency Leadership Council. He is also a trustee of the
US Naval Academy Foundation, and a trustee of the Benedictine
Foundation.
Jay M.
Kaplowitz has served as our director since September 2000. Mr.
Kaplowitz has served as a member of the Compensation Committee of our Board of
Directors since January 2004. Mr. Kaplowitz is a founding partner of
the law firm Gersten Savage LLP, our securities counsel. Mr.
Kaplowitz has more than thirty years experience in corporate, banking and
securities law. He has negotiated and structured numerous financial
and business transactions and has extensive expertise in public and private
equity and debt offerings. Mr. Kaplowitz is a managing member of
Formula Capital, LLC, a private equity fund, and is on the board of Rusoro
Mining Ltd., a company listed on the TSXV (CDNX: RML.V) and of several private
companies. He received a JD from Boston University, and a BA from
Brooklyn College, City University of New York.
36
Benjamin
Krieger has served as our director since September 1999. Mr. Krieger has
served as a member of the Compensation Committee and the Audit Committee of our
Board of Directors since January 2004. Mr. Krieger is currently a partner with
WhiteKnight Solutions, LLC, a business consulting firm that specializes in
acquisitions, divestitures and strategic alliances. Mr. Krieger was formerly a
partner with Corporate Development International, an international company
search firm, where he specialized in the pulp and paper, packaging, graphic arts
and distribution industries. Prior to Corporate Development International, he
was President, CEO and a director of Ris Paper Company. Mr. Krieger began his
career with the Mead Corporation where he was promoted through the Company
during his 25-year tenure.
Ashok Kaveeshwar,
Ph.D. has served as our director since March 2007. Dr. Kaveeshwar has
served as a member of the Executive Committee of our Board of Directors since
2007. Dr. Kaveeshwar has 35 years of technical, management and executive
experience with high technology firms serving both the public and private
sectors. He has also served in the Federal Government as the first administrator
of the Research & Innovative Technology Administration (RITA) at the United
States Department of Transportation, a Presidential appointment requiring Senate
confirmation. Prior to that, he was President of Orange Technologies, Inc, a
company providing government and commercial customers with project life cycle
management software and solutions. Previously, Dr. Kaveeshwar held various
senior executive positions with Raytheon Corporation, Hughes Electronics
Corporation, ST Systems Corporation (STX) and Systems & Applied Sciences
Corporation. Dr. Kaveeshwar has a Ph.D. in Physics from the University at
Buffalo (SUNY), Buffalo, NY.
In fiscal
year 2009, the Board of Directors met ten ( 10 ) times (including by
teleconference). All directors attended at least 75% of the
meetings.
Involvement
in Certain Legal Proceedings
No
director, person nominated to become a director, executive officer, promoter or
control person of ours has, during the last five years: (i) been convicted in or
is currently subject to a pending a criminal proceeding (excluding traffic
violations and other minor offenses); (ii) been a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to any
Federal or state securities or banking or commodities laws including, without
limitation, in any way limiting involvement in any business activity, or finding
any violation with respect to such law, nor (iii) any bankruptcy petition been
filed by or against the business of which such person was an executive officer
or a general partner, whether at the time of the bankruptcy or for the two years
prior thereto.
Independence
of Directors
The Board
has determined that Messrs. Bruno, VADM Burkhalter, Kaplowitz, Kaveeshwar and
Krieger, are independent directors as defined in NASDAQ Marketplace Rule
4200.
Committees
of the Board
During
the fiscal year ended October 31, 2009, the Board of Directors held a total of
ten (10) meetings (including by teleconference). All incumbent directors
attended at least 75% of the aggregate of all meetings of the Board of Directors
and any committees of the Board on which they served, during the fiscal year
ended October 31, 2009.
The Audit
Committee appoints and provides for the compensation of our independent
auditors; oversees and evaluates the work and performance of the independent
auditors; reviews the scope of the audit; considers comments made by the
independent auditors with respect to accounting procedures and internal controls
and the consideration given thereto by our management; approves all professional
services to be provided to us by our independent auditors; reviews internal
accounting procedures and controls with our financial and accounting staff;
oversees a procedure that provides for the receipt, retention and treatment of
complaints received by us and of confidential and anonymous submissions by
employees regarding questionable accounting or auditing matters; and performs
related duties as set forth in applicable securities laws, and the Audit
Committee charter (the “Audit Committee”). The Audit Committee
functions pursuant to the Audit Committee charter adopted by the Board in fiscal
2001. A copy of the Audit Committee Charter can be found on our web
site at www.steelcloud.com .
The Audit Committee met four ( 4 ) times (including by teleconference) during
the fiscal year ended October 31, 2009. The Audit Committee is
currently composed of James Bruno, VADM Burkhalter and Benjamin
Krieger. The Board has determined that all current members of the
Audit Committee are independent directors under the rules of
the NASDAQ Stock Market and each of them is able to read and
understand fundamental financial statements. The Board has determined
that James Bruno is the Company’s Audit Committee “financial expert” as defined
in Item 407(d) of Regulation S-K.
37
The
Compensation Committee has such powers as may be assigned to it by the Board of
Directors from time to time and is currently charged with, among other things,
determining compensation packages for our Chief Executive Officer, President and
Chief Financial Officer, establishing salaries, bonuses and other compensation
for our executive officers and with administering our Amended 2007 Stock Option
and Restricted Stock Plan, our 2002 Incentive Stock Option Plan, as amended and
our 1997 Incentive Stock Option Plans, as amended ( collectively, the "Stock
Option Plans"), the 1998 Employee Stock Purchase Plan, as amended (the "1998
Purchase Plan") and recommending to the Board of Directors changes to such plans
(the “Compensation Committee”). Generally, on its own initiative the
Compensation Committee reviews the performance and compensation of our Chief
Executive Officer and Chief Financial Officer and, following discussions
with those individuals, establishes their compensation levels where it deems
appropriate. For the remaining officers, the Chief Executive Officer makes
recommendations to the Compensation Committee that generally, with such
adjustments and modifications that are deemed necessary or appropriate by the
Compensation Committee, are approved. With respect to equity-based compensation
awarded to others, the Compensation Committee grants stock-based compensation,
generally based upon the recommendation of the Chief Executive
Officer. The Compensation Committee met one ( 1 ) time (including by
teleconference) during the fiscal year ended October 31, 2009. The
Compensation Committee is currently composed of VADM Burkhalter, Jay M.
Kaplowitz and Benjamin Krieger. The Board has determined that all
current members of the Compensation Committee are independent directors under
the rules of the NASDAQ Stock Market. The Compensation Committee does
not have a charter.
The Board
of Directors has an Executive Committee (the "Executive Committee"), the members
of which are VADM Burkhalter and Ashok Kaveeshwar. The Executive Committee has
such powers as may be assigned to it by the Board of Directors from time to time
and is currently charged with, among other things, recommending to the Board of
Directors the criteria for candidates to the Board of Directors, the size of the
Board of Directors, the number of committees of the Board of Directors and their
sizes and functions, and the nomination and selection of Board of Directors'
candidates and committee members and rotation of committee
members. In addition, the Executive Committee is responsible for
establishing and implementing an annual evaluation process for the Chief
Executive Officer and the Board of Directors and periodically assessing the
overall composition of the Board of Directors to ensure an effective membership
mix and, when appropriate, recommending to the Board of Directors a Chief
Executive Officer succession plan and succession process. The
Executive Committee met six ( 6 ) times during the fiscal year ended October 31,2009. The Executive Committee does not have a charter.
Code
of Ethics
On
September 9, 2004, the Board adopted a Code of Ethics that applies to the Chief
Executive Officer, Principal Executive Officers, Senior Financial Officers and
Board of Directors. A copy of the Code of Ethics can be found on our
web site at www.steelcloud.com
.. The Code of Ethics sets forth our policies and expectations on a
number of topics, including: Integrity of Records and Financial Reporting;
Compliance with Laws, Rules and Regulations; Conflict of Interest; Corporate
Opportunities; Fair Dealing; Confidentiality; Reporting any Illegal or Unethical
Behavior; and Waivers.
The Audit
Committee of the Board of Directors reviews the Code of Ethics annually, and
proposes changes or amendments to the Code of Ethics as
appropriate. Changes or amendments proposed by the Audit Committee
are submitted to the Board of Directors for review.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of March 11, 2010, with
respect to the beneficial ownership of the common stock by each beneficial owner
of more than 5% of the outstanding shares thereof, by each Director, each
nominee to become a Director and each executive named in the Summary
Compensation Table and by all Executive Officers, Directors and nominees to
become Directors of our Company. As of March 11, 2010, we had
16,040,001 shares of common stock outstanding. Pursuant to the rules
and regulations of the Securities and Exchange Commission, shares of common
stock that an individual or group has a right to acquire within 60 days pursuant
to the exercise of options or warrants are deemed to be outstanding for the
purposes of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purposes of computing the percentage
ownership of any other person shown in the table.
38
Title of Class
Name and Address of Beneficial
Owner
1
Amount and
Nature
of Beneficial
Ownership
Percentage
of Class
Common
Stock
Brian
H. Hajost 2
356,000
2.2
%
Common
Stock
VADM
E.A. Burkhalter 3
241,376
1.5
%
Common
Stock
Benjamin
Krieger 4
219,576
1.4
%
Common
Stock
James
Bruno 5
232,376
1.4
%
Common
Stock
Jay
M. Kaplowitz 6
220,506
1.4
%
Common
Stock
Ashok
Kaveeshwar 7
175,000
1.1
%
All
Executive Officers and Directors as a Group ( 6
persons)(2)-(7)
1,444,834
9.0
%
1
The
address of each of such individuals is c/o SteelCloud, Inc., 20110
Ashbrook Place, Suite 130, Ashburn, Virginia20147.
2
Includes
100,000 shares of our common stock underlying stock options granted
pursuant to the 2002 Stock Option Plans which are exercisable in 30
days. Includes 156,000 of Restricted Stock, issued to Mr.
Hajost pursuant to his employment agreement and 50,000 shares of our
common stock underlying warrants. The shares of Restricted
Stock vest ratably over a period of one year from the anniversary date of
the grant, February 5, 2009. These restricted shares of stock
were issued pursuant to our Amended 2007 Stock Option and Restricted Stock
Plan.
3
Includes
100,000 shares of our common stock underlying stock options granted
pursuant to the 1997 and 2002 Stock Option Plans, of which all are
currently exercisable, 50,000 shares of our common stock underlying
warrants and 6,000 shares owned by Mr. Burkhalter’s spouse of which he
disclaims beneficial ownership.
4
Includes
75,000 shares of our common stock underlying stock options granted
pursuant to the 1997 and 2002 Stock Option Plans, of which all are
currently exercisable and 50,000 shares of our common stock underlying
warrants.
5
Includes
90,000 shares of our common stock underlying stock options granted
pursuant to the 1997 and 2002 Stock Option Plans, of which all are
currently exercisable and 50,000 shares of our common stock underlying
warrants.
6
Includes
85,000 shares of our common stock underlying stock options granted
pursuant to the 1997 and 2002 Stock Option Plans, of which all are
currently exercisable and 50,000 shares of our common stock underlying
warrants.
7
Includes
65,000 shares of our common stock underlying stock options granted
pursuant to the 2002 Stock Option Plan, of which all are currently
exercisable and 50,000 shares of our common stock underlying
warrants.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We paid
approximately $93,000 and $ 90,000 during fiscal year 2008 and 2009,
respectively, to Gersten Savage LLP in connection with legal
services. Jay M. Kaplowitz, a member of the Company’s Board of
Directors, and a member of the Compensation Committee, is a partner at Gersten
Savage LLP.
Our
executive officers and directors may be considered our promoters due to their
participation in and management of the business since our
incorporation.
As we
previously disclosed in a Current Report on Form 8-K filed with the SEC on July8, 2009, on July 1, 2009 we entered into a Business Loan and Security Agreement
with Caledonia Capital Corporation, a Delaware corporation, (referred to as the
“Lender”) pursuant to which the Lender agreed to lend us $250,000 in the form of
a Secured Promissory Note (referred to as the “Loan”). The Loan
bears interest at a rate of 15% per annum, and is payable in quarterly
installments commencing three months after July 1, 2009, or October 1,2009. Mr. Steven Snyder, our Principal Financial Officer, was a
member of a group of individuals who invested money with the Lender for purposes
of making the Loan to us . Mr. Snyder’s investment in the Loan was
$25,000. At the time of Mr. Snyder’s investment, he was an unrelated
party to us. The amount outstanding on the Loan as of March 11,2010 is $250,000. As of March 11, 2010, we have made interest
payments of approximately $27,400 and $0 principal payments on the
Loan.
This
information is provided under the heading “ Directors and Executive
Officers-Independence of Directors .”
EXECUTIVE
COMPENSATION
The
following table sets forth certain information regarding compensation paid by us
during each of our last two fiscal years to our Chief Executive Officer and to
each of the Company’s executive officers who were paid in excess of $100,000
(the “Named Officers”).
Summary
Compensation Table
Name
and Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($) 1
Option
Awards
($)
Other
($) 2
Total
($)
Brian
Hajost 3
2009
158,325
-0-
32,760
10,780
15,568
217,433
Robert
E. Frick 4
2009
62,758
-0-
(5,000
)
(32,024
)
43,067
68,621
President
and Chief Executive Officer
2008
267,000
-0-
-0-
50,624
21,731
339,355
Kevin
M. Murphy 5
2009
209,288
-0-
23,380
55,881
21,596
310,145
Chief
Financial Officer and
Executive
Vice President
2008
220,000
-0-
-0-
76,274
25,988
322,262
1
In
fiscal year 2009, two of the named executive officers forfeited
options. Mr. Frick forfeited 66,666 shares of non-vested
restricted stock and 66,666 stock options. Mr. Murphy forfeited
175,000 stock options. In fiscal year
2008, none of the named executive officers forfeited
options. For additional information pertaining to assumptions
made in determining the value of the stock awards, please see footnote 10,
“Stock Based Compensation”, to our financial
statements.
2
Other
compensation includes commissions, accumulated leave payouts, fixed
expense allowances, 401K match expense and health and dental insurance
provided by us.
3
Mr.
Hajost joined us in January 2009 as President, Chief Executive Officer and
Director.
4
Mr.
Frick joined us in August 2007 as Executive Director and was appointed to
our Board of Directors. In October 2007, Mr. Frick was named
our President and Chief Executive Officer. Mr. Frick’s
employment with us ended on January 9, 2009.
5
Mr.
Murphy resigned as our Chief Financial Officer and Executive Vice
President effective November 30,2009.
40
Narrative
Disclosure to Summary Compensation Table
Employment
Agreements; Termination of Employment
On
January 12, 2009 (the “Agreement Date”), we entered into an Amendment to
Employment Agreement (the “Amended Agreement”) with Robert E. Frick, our then
Chief Executive Officer and President, pursuant to which the terms of Mr.
Frick’s employment agreement, dated August 27, 2007, were amended. Under the
terms of the Amended Agreement, the parties agreed that Mr. Frick’s employment
with us terminated effective January 9, 2009 as a result of Mr. Frick’s
health. Further, pursuant to the Amended Agreement, Mr. Frick
resigned from our Board of Directors. Mr. Frick received paid family
health and dental insurance under our standard policies for six months from the
Agreement Date and $10,231 as compensation for Mr. Frick’s retained leave
balance of 10 days. Additionally, Mr. Frick served as a consultant
for us for six months from the Agreement Date for compensation of $11,250 per
month.
On
February 5, 2009, we entered into an Executive Retention Agreement (the “2009
Agreement”) with Brian Hajost, our President and Chief Executive Officer,
effective as of January 16, 2009. Pursuant to the terms of the 2009
Agreement, as compensation for Mr. Hajost serving as our President and Chief
Executive Officer, Mr. Hajost receives (a) a semi-monthly salary of $8,333.33
(or $200,000 annually); (b) a stock grant of 156,000 shares of our common stock,
which will vest ratably over 12 months; and (c) a stock option grant of 300,000
shares of our common stock, which will vest ratably over a three year term and
have a five year exercise period. The 2009 Agreement further provides
that in the event that we terminate Mr. Hajost’s employment without cause (other
than due to Mr. Hajost’s request), or if Mr. Hajost terminates his employment
for good reason, Mr. Hajost will be entitled to (a) if the termination takes
place within three months from the date of the 2009 Agreement, two months
salary, (b) if the termination takes place between three and six months from the
date of the 2009 Agreement, three months salary, (c) if the termination takes
place between six months and one year from the date of the 2009 Agreement, six
months salary, (d) if the termination takes place after the first year
anniversary of the 2009 Agreement, 12 months salary. In the event
that a majority of our common stock or a substantial portion of our assets are
acquired, the acquisition closes while Mr. Hajost is employed by us, and Mr.
Hajost’s employment with us is terminated without cause (other than due to Mr.
Hajost’s request) within 30 days of the acquisition, Mr. Hajost will be entitled
to severance pay equal to the lesser of (a) 24 months salary based on Hajost’s
annual rate of pay for the calendar year before the calendar year of termination
from service, or (b) two times the IRS limit for qualified plans provided for in
26 U.S.C. § 401(a)(17) for the calendar year of termination of
service.
Our
compensation programs are intended to enable us to attract, motivate, reward and
retain the management talent required to achieve corporate objectives, and
thereby increase stockholder value. It is our policy to provide incentives to
senior management to achieve both short-term and long-term objectives and to
reward exceptional performance and contributions to the development of the
business. To attain these objectives, the executive compensation program
includes four key components:
Base
Salary .
Base salary for the Company’s executives is
intended to provide competitive remuneration for services provided to the
Company over a one-year period. Base salaries are set at levels designed to
attract and retain the most appropriately qualified individuals for each of the
key management level positions within the Company.
Cash Incentive
Bonuses .
Our bonus programs are intended to reward
executive officers for the achievement of various annual performance goals
approved by the Company’s Board of Directors. For fiscal 2009, no performance
based bonus was approved for our executive officers in light of our need for
additional working capital.
We
anticipate that a performance based bonus plan will be established for certain
of our executive officers, once we are able to meet our minimum working capital
requirements. The bonus plan will likely be comprised of a
specified profit based bonus pool which will be based upon our achievement of
certain annual profit targets.
Equity-based
Compensation .
Equity-based compensation is designed to provide
incentives to our executive officers to build shareholder value over the long
term by aligning their interests with the interest of shareholders. The
Compensation Committee of the Board of Directors believes that equity-based
compensation provides an incentive that focuses the executive's attention on
managing the company from the perspective of an owner with an equity stake in
the business. Among our executive officers, the number of shares of stock
awarded or common stock subject to options granted to each individual generally
depends upon the level of that officer's responsibility. The largest grants are
generally awarded to the most senior officers who, in the view of the
Compensation Committee, have the greatest potential impact on the Company’s
profitability and growth. Previous grants of stock options or stock grants are
reviewed in determining the size of any executive's award in a particular
year.
·
Incentive
Stock Option Plans
Under our
1997 Stock Option Plan (the “1997 Option Plan”), options to purchase a maximum
of 2,650,000 shares of our common stock (subject to adjustments in the event of
stock splits, stock dividends, recapitalizations and other capital adjustments)
may be granted to our employees, officers and Directors and certain other
persons who provide services to us . As of October 31, 2009 there were no
options to purchase shares of common stock available for grant pursuant to the
Option Plan . In fiscal year 2008 we granted no options pursuant to the 1997
Option Plan. In fiscal year 2009 we granted no options pursuant to
the 1997 Option Plan.
Under our
2002 Stock Option Plan (the “2002 Option Plan”), options to purchase a maximum
of 1,500,000 shares of our common stock (subject to adjustments in the event of
stock splits, stock dividends, recapitalizations and other capital adjustments)
may be granted to our employees, officers and Directors and certain other
persons who provide services to us. As of October 31, 2009 there were 456,210
options to purchase shares of common stock available for grant pursuant to the
2002 Option Plan . In fiscal year 2008 we granted 1,015,000 options pursuant to
the 2002 Option Plan. In fiscal year 2009 we granted 450,000 options pursuant to
the 2002 Option Plan.
Under our
Amended 2007 Stock Option and Restricted Stock Plan (the “2007 Option Plan”),
options to purchase a maximum of, or restricted stock for a maximum of 1,500,000
shares of our common stock (subject to adjustments in the event of stock splits,
stock dividends, recapitalizations and other capital adjustments) may be granted
to our employees, officers and Directors and certain other persons who provide
services to the Company. As of October 31, 2009 there were 1,035,250 options to
purchase shares of common stock or shares of restricted stock available for
grant pursuant to the 2007 Option Plan . No shares of restricted stock or stock
options were issued in fiscal year 2008 pursuant to the 2007 Option
Plan. 546,000 shares of restricted stock were issued in fiscal year
2009 pursuant to the 2007 Option Plan.
·
Employee
Stock Purchase Plan
In August
1998, the Board adopted an Employee Stock Purchase Plan (the “Purchase Plan”)
whereby employees may purchase our common stock through a payroll deduction
plan. The purchase price of the common stock is 85% of the market price. All
employees, including officers but not Directors, are eligible to participate in
this plan. Executive officers whose stock ownership of our common stock exceeds
five percent of the total outstanding common stock are not eligible to
participate in this plan.
An
amendment to the Purchase Plan, which was approved at the 2006 Annual Meeting of
Shareholders, held in 2007, increased the total number of shares reserved for
issuance thereunder from 300,000 to 600,000. As of January 22, 2010 there were
267,765 options to purchase shares of common stock available for grant pursuant
to the Purchase Plan. No shares were purchased under this plan in
fiscal 2008 while 637 shares were purchased under this plan in fiscal 2008 at a
price of $0.69 per share.
42
Retirement
Plans . We established a discretionary contribution plan
effective May 1, 1999 (the “401(k) Plan”) for its employees who have completed
one month of employment with us. The 401(k) Plan is administered by Fidelity
Investments and permits pre-tax contributions by participants pursuant to
Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), up
to the maximum allowable contributions as determined by the Code. We may match
participants’ contributions on a discretionary basis. In fiscal 2009, we
contributed $0.25 for each $1.00 contributed by an employee up to a maximum of
6% of an employee’s annual compensation.
Health and
Welfare Benefits and Other Perquisites . Our full time
executive officers are entitled to participate in all of our employee benefit
plans, including medical, dental, group life, disability, accidental death and
dismemberment insurance and our sponsored 401(k).
Repricing of
Equity Based Grants . No options or other equity based grants were
re-priced during the fiscal year ended October 31, 2009.
Based
on the closing price of the Company’s Common Stock of $0.26 per share on
10/31/2009.
2
100,000
options vest on 2/5/2010, 2/5/2011 and
2/5/2012.
3
37,500
options vested on 11/30/2009 and 37,500 options were to vest on 2/28/2010,
however, Mr. Murphy resigned from his employment with us effective
11/30/2009 and as a result, he forfeited those
options.
Please
see “ Item 11 – Executive
Compensation – Narrative Disclosure to Summary Compensation Table ” for
the material terms of (a) our employment agreements, and (b) of each plan that
provides for the payment of retirement benefits.
43
Compensation
of Directors
We do not
compensate Directors who also serve as our executive officers for their services
on the Board. During fiscal 2009, we did not compensate our non-employed
Directors for participation at meetings of the Board and Committees of the
Board. The following table reflects all compensation awarded to,
earned by or paid to our Directors for the fiscal year ended October 31,2009.
Name
Fees
earned
or
paid in
cash
($)
Option
a
wards
($)
All other
Compensation
($)
1
Total
($)
James
Bruno
-0-
14,541
2
2,186
19,504
Al
Burkhalter
-0-
14,541
3
173
18,265
Jay
M. Kaplowitz
-0-
14,541
4
-0-
13,372
Ashok
Kaveeshwar
-0-
14,541
5
-0-
13,925
Ben
Krieger
-0-
14,541
6
2,434
19,888
1
Consists
solely of travel expenses paid by the Company for travel to Board of
Director Meetings.
Members
of our Board of Directors receive $1,000 for each Board of Directors meeting
attended. In addition, each member of the Audit Committee receives
$500 for each Audit Committee meeting attended. Audit Committee
members shall be entitled to receive a total of $1,500 in their capacity as both
a director and Audit Committee member.
44
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended (the “Act”) may be permitted for our directors, officers and controlling
persons we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
45
No
dealer, salesperson or any other person is authorized to give any information or
make any representations in connection with this offering other than those
contained in this prospectus and, if given or made, the information or
representations must not be relied upon as having been authorized by us. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this prospectus, or an
offer to sell or a solicitation of an offer to buy any securities by anyone in
any jurisdiction in which the offer or solicitation is not authorized or is
unlawful.
Up
to 16,000,000 Shares of Common Stock together with 16,000,000
Warrants
And
Up
to 800,000 Shares of Common Stock Underlying Placement Agent
Warrants
PROSPECTUS
___,
2010
46
PART
II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13.
Other
Expenses of Issuance and
Distribution.
The
following table sets forth the expenses payable by us in connection with this
offering (not including the Placement Agent Fee) of securities described in this
registration statement. All amounts shown are estimates, except for the SEC
registration fee. We will bear all expenses shown below and the Placement Agent
Fee.
SEC
filing fee
$
578
Accounting
fees and expenses
$
15,000
Legal
fees and expenses
$
40,000
Printing
and engraving expenses
$
1,422
Other
$
-
Total
$
57,000
Item
14.
Indemnification
of Directors and Officers.
Our
By-Laws, as amended to date, provide for indemnification of officers and
directors to the fullest extent permitted by the Virginia Stock Corporation Act,
provided such officer or director acts in good faith and in a manner which such
person reasonably believes to be in or not opposed to the best interests of the
registrant, and with respect to any criminal matter, had no reasonable cause to
believe such person’s conduct was unlawful.
Virginia
Stock Corporation Act
Section
697 A of the Virginia Stock Corporation Act (“VSCA”) provides that a corporation
may indemnify an individual made a party to a proceeding because he is or was a
director against liability incurred in the proceeding if (1) he conducted
himself in good faith, (2) he believed, in the case of conduct in his official
capacity with the corporation, that his conduct was in its best interests, and,
in all other cases, that his conduct was at least not opposed to its best
interests, and (3) in the case of any criminal proceeding, he had no reasonable
cause to believe his conduct was unlawful. Section 697 C of the VSCA provides
that the termination of a proceeding by judgment, order, settlement or
conviction is not, of itself, determinative that the director did not meet the
standard of conduct set forth in Section 697 A.
Section
697 D of the VSCA provides that a corporation may not indemnify a director under
Section 697 in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation, or in
connection with any other proceeding charging improper personal benefit to him,
whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Indemnification permitted under Section 697 of the VSCA in connection with
a proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section
698 of the VSCA states that, unless limited by its articles of incorporation, a
corporation shall indemnify a director who entirely prevails in the defense of
any proceeding to which he was a party because he is or was a director of the
corporation against reasonable expenses incurred by him in connection with the
proceeding.
Section
701 of the VSCA provides that a corporation may not indemnify a director under
Section 697 unless authorized in the specific case after a determination has
been made that indemnification of the director is permissible in the
circumstances because he has met the standard of conduct set forth in Section
697. Such determination is to be made (1) by the board of directors by a
majority vote of a quorum consisting of directors not at the time parties to the
proceeding, (2) if such a quorum is not obtainable, by majority vote of a
committee duly designated by the board of directors (in which designation
directors who are parties may participate), consisting solely of two or more
directors not at the time parties to the proceeding, (3) by special legal
counsel selected as set forth in the statute, or (4) by the shareholders
(without the vote of shares owned by or voted under the control of directors who
are at the time parties to the proceeding).
Section
699 of the VSCA provides that a corporation may pay for or reimburse the
reasonable expenses incurred by a director who is a party to a proceeding in
advance of the final disposition of the proceeding if (1) the director furnishes
the corporation a written statement of his good faith belief that he has met the
standard of conduct described in Section 697, (2) the director furnishes the
corporation a written undertaking to repay the advance if it is ultimately
determined that he did not meet the standard of conduct, and (3) a determination
is made that the facts then known to those making the determination would not
preclude indemnification. Determinations and authorizations of payments under
Section 699 are to be made in the manner specified in Section 701 of the
VSCA.
II-1
Under
Section 700.1 of the VSCA, an individual who is made a party to a proceeding
because he is or was a director of a corporation may apply to a court for an
order directing the corporation to make advances or reimbursement for expenses
or to provide indemnification. The court shall order the corporation to make
advances and/or reimbursement for expenses or to provide indemnification if it
determines that the director is entitled to such advances, reimbursement or
indemnification and shall also order the corporation to pay the director’s
reasonable expenses incurred to obtain the order. With respect to a proceeding
by or in the right of the corporation, the court may (1) order indemnification
of the director to the extent of his reasonable expenses if it determines that,
considering all the relevant circumstances, the director is entitled to
indemnification even though he was adjudged liable to the corporation and (2)
also order the corporation to pay the director’s reasonable expenses incurred to
obtain the order of indemnification.
Section
702 of VSCA states that, unless limited by a corporation’s articles of
incorporation, (1) an officer of the corporation is entitled to mandatory
indemnification under Section 698 of the VSCA, and is entitled to apply for
court-ordered indemnification under Section 700 of the VSCA, to the same extent
as a director, and (2) the corporation may indemnify and advance expenses to an
officer, employee or agent of the corporation to the same extent as to a
director.
Section
703 of the VSCA provides that a corporation may purchase and maintain insurance
on behalf of an individual who is or was a director, officer, employee or agent
of the corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against liability asserted against him or incurred by him in that
capacity, or arising from his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Sections 697 or 698 of the VSCA.
Section
704 of the VSCA states that a corporation shall have power to make any further
indemnity, including indemnity with respect to a proceeding by or in the right
of the corporation, and to make additional provision for advances and
reimbursement of expenses, to any director, officer, employee or agent that may
be authorized by its articles of incorporation or any bylaw made by the
shareholders or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against (1) his willful misconduct, or (2) a
knowing violation of the criminal law. Unless the articles of incorporation, or
any such bylaw or resolution expressly provide otherwise, any determination as
to the right to any further indemnity shall be made in accordance with Section
701 B of the VSCA. Each such indemnity may continue as to a person who has
ceased to have the capacity referred to above and may inure to the benefit of
the heirs, executors and administrators of such person.
Article
11 of our Articles of Incorporation provides that we shall, to the fullest
extent permitted by the law of Virginia, indemnify an individual who is or was
our director or officer and who was, is, or is threatened to be made, a named
defendant or respondent in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal (collectively, a “proceeding”), against any obligation to pay
a judgment, settlement, penalty, fine (including any excise tax assessed with
respect to any employee benefit plan) or other liability and reasonable expenses
(including counsel fees) incurred with respect to such a proceeding, except such
liabilities and expenses as are incurred because of such director’s or officer’s
willful misconduct or knowing violation of criminal law.
Article
11 also provides that unless a determination has been made that indemnification
is not permissible, we shall make advances and reimbursements for expenses
reasonably incurred by a director or officer in a proceeding as described above
upon receipt of an undertaking from such director or officer to repay the same
if it is ultimately determined that such director or officer is not entitled to
indemnification.
Article
11 also provides that the determination that indemnification is permissible, the
authorization of such indemnification (if applicable), and the evaluation as to
the reasonableness of expenses in a specific case shall be made as provided by
law. Special legal counsel selected to make determinations under such Article 11
may be counsel for us. The termination of a proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not of itself create a presumption that a director or officer acted in
such a manner as to make him or her ineligible for indemnification. For the
purposes of Article 11, every reference to a director or officer includes,
without limitation, (1) every individual who is our director or officer, (2) an
individual who, while a director or officer, is or was serving at our request as
a director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, (3) an individual who formerly was our director or officer
or who, while a director or officer, occupied at our request any of the other
positions referred to in clause (2) of this sentence, and (4) the estate,
personal representative, heirs, executors and administrators of our director or
officer or other person referred to herein. Service as a director, officer,
partner, trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
controlled by us is deemed service at our request. A director or officer is
deemed to be serving an employee benefit plan at our request if such person’s
duties to us also impose duties on, or otherwise involve services by, such
person to the plan or to participants in or beneficiaries of the
plan.
II-2
Indemnification
Agreements
We may
enter into indemnification agreements with our directors and officers for the
indemnification of and advancing of expenses to such persons to the fullest
extent permitted by law.
In
addition, we maintain directors’ and officers’ liability insurance which insures
against liabilities that our directors and officers may incur in such
capacities.
Reference
is made to “Undertakings,” below, for the registrant’s undertakings in this
registration statement with respect to indemnification of liabilities arising
under the Securities Act of 1933, as amended.
Item
15.
Recent
Sales of Unregistered Securities.
On June19, 2009, we sold an aggregate of 350,000 shares of our common stock, $.001 par
value per share, to our seven directors, for aggregate cash proceeds of
$87,500. The shares of common stock were sold at $0.25 per
share. Each share of common stock was accompanied by one Director
Warrant to purchase one additional share of common stock. The
Director Warrants are exercisable for five years from the date that our
shareholders approved the issuance of the Director Warrants, at an exercise
price of $0.25 per share.
On July1, 2009, we entered into a Business Loan and Security Agreement, referred to as
the “Agreement, ” with Caledonia Capital Corporation, a Delaware corporation,
referred to as the “Lender , ” pursuant to which the Lender agreed to lend to us
$250,000 in the form of a Secured Promissory Note, referred to as the “Note , ”
which was issued on July 1, 2009, referred to as the “Issuance Date. ”
The Note originally provided for a maturity date of December29, 2009, referred to as the “Maturity Date” and an annual interest rate of
15%. The Note was amended on December 29, 2009 to provide that (a)
the annual interest rate of the Note is 20%, (b) accrued interest under the Note
shall be payable in monthly installments commencing February 1, 2010, and
continuing on the first business day of each successive month, and (c) the
Maturity Date is March 31, 2010. There are no penalties for early
prepayment of the Note. In the event that any installment of
principal and/or interest due under the Note is not received by the Lender
within ten (10) days after the date when the same is due, then we shall be
required to pay a late charge of 5.0% of such
installment. Additionally, in the event that we receive investments
from one or more investors in one or more transactions in an aggregate amount in
excess of $750,000.00, whether in the form of cash, negotiable or non-negotiable
instruments or any form of payment in exchange for the issuance of any
certificated or non-certificated security, whether in the form of debt or
equity, referred to as an “Equity Raise , ” at any time between the Issuance
Date and the maturity date, then, we shall be required, within five (5) business
days after the Equity Raise first exceeds $750,000.00, to curtail the accrued
interest and outstanding principal balance of the Note by an amount equal to the
amount by which the Equity Raise then exceeds $750,000.00 (but in no event by
more than the then outstanding principal balance and interest accrued on the
Note). Pursuant to the Agreement and the Note, our obligations thereunder are
secured by a first priority lien in and to all of our intellectual property
rights, title and interest in and to the SteelWorks® Mobile integrated server
appliance software. The Agreement contains standard representations
and warranties for a transaction of this type. As an inducement to
the Lender to make the loan to us, we issued to the Lender a warrant, referred
to as the “Warrant , ” to purchase up to 625,000 shares of our common stock,
$0.001 par value per share. As an inducement for the Lender to amend
the terms of the Note, we agreed to pay the Lender $25,000. The Warrant is
exercisable for four years at an exercise price of $0.15 per
share. The exercise price may be adjusted in the event of any stock
dividend, stock split, stock combination, reclassification or similar
transaction. Additionally, our Board of Directors has the discretion to reduce
the then-current exercise price to any amount at any time during the term of the
Warrant for any period of time the Board deems appropriate. We have
agreed to prepare and file a registration statement on or about August 31, 2009
for the purposes of registering the resale of the shares of common stock
underlying the Warrant. The terms of the transaction were the result
of arm’s length negotiations between us and the Lender. Prior to the
completion of the transaction, neither we nor any of our affiliates or officers,
directors or their associates had any material relationship with the Lender,
other than in respect of the applicable material definitive agreements and the
transactions contemplated therein and related thereto.
On August24, 2009, we converted $6,000 of outstanding fees owed to our investor relations
firm, Rubenstein Investor Relations into a warrant to purchase 115,000 shares of
our common stock, at $0.20 per share. The warrant is exercisable for
five years from August 24, 2009.
On
October 23, 2009, we converted $35,000 of outstanding legal fees into shares of
our common stock, at $0.32 per share, the closing price of our common stock on
October 23, 2009. As a result of the conversion, we issued 109,375
shares of our common stock to Gersten Savage LLP, our legal
counsel.
II-3
On
November 3, 2009, we entered into a Line of Credit and Security Agreement,
referred to herein as the “Credit and Security Agreement, ” with the Lender
pursuant to which the Lender agreed to extend to us a revolving line of credit
in the amount of $150,000, in the form of a Revolving Line of Credit Promissory
Note, referred to herein as the “Credit Note . ” The Credit Note
bears interest at a rate of 15% per annum, and is payable in monthly
installments commencing 30 days after November 3, 2009, which was the date when
we issued the Credit Note. The principal amount of the Credit Note,
together with interest accrued and unpaid thereon and all other sums due, shall
be due and payable in full upon the earlier to occur of (a) March 31, 2010, or
(b) the date we shall have raised a total of not less than $1,000,000 in capital
invested in our equity which is accompanied by our issuing shares of stock which
were not trading in the public markets prior to the date of the Credit
Note. There are no penalties for early prepayment of the Credit
Note. The Credit Note is a revolving line of credit
note. Principal advances may be made, from time to time, by the
Lender up to the principal amount of the Credit Note, and principal payments may
be made, from time to time by us to reduce the principal balance owing pursuant
to the Credit Note. Our obligations under the Credit and Security
Agreement and the Credit Note are secured by a lien in and to all of our rights,
title and interest in and to its furniture, fixtures, equipment, supplies,
receivables, intangibles, and inventory, together with all present and future
substitutions, replacements and accessories thereto and all present and future
proceeds and products thereof, in any form whatsoever, referred to herein as the
“Collateral . ” As an inducement to the Lender to make the loan, we
agreed to issue to the Lender a warrant, referred to herein as the “Credit
Warrant , ” to purchase 2.5 shares of our common stock for every dollar we
borrow pursuant to the Credit and Security Agreement. The Credit
Warrant is exercisable for four years at an exercise price of $0.25 per
share. The exercise price may be adjusted in the event of any stock
dividend, stock split, stock combination, reclassification or similar
transaction. On November 4, 2009, we borrowed $60,000 pursuant to the Credit and
Security Agreement and the Credit Note, and issued to the Lender a Credit
Warrant to purchase up to 150,000 shares of our common stock. On
November 23, 2009, we borrowed $90,000 pursuant to the Credit and Security
Agreement and the Credit Note, and issued to the Lender a Credit Warrant to
purchase up to 225,000 shares of our common stock. The terms of the
transaction were the result of arm’s length negotiations between us and the
Lender. Prior to the completion of the transaction, neither we nor
any of our affiliates or officers, directors or their associates had any
material relationship with the Lender, other than in respect of the applicable
material definitive agreements and the transactions contemplated therein and
related thereto.
We relied
on the exemption from the registration provisions of the Securities Act of 1933,
as amended, contained in Section 4(2) thereof for each of the transactions
described above.
Form
of Placement Agent Warrant. (Filed as Exhibit 4.3 to Amendment
No. 5 to the Company’s Registration Statement dated October 23, 2009
(Registration No. 333-158703) and hereby incorporated by
reference).
4.3.1
Amended
Form of Placement Agent Warrant. (Filed as Exhibit 4.3.1 to
Amendment No. 6 to the Company’s Registration Statement dated October 29,2009 (Registration No. 333-158703) and hereby incorporated by
reference).
4.3.2
Amendment
No. 2 to Form of Placement Agent Warrant (Filed as Exhibit 4.3.2 to
Amendment No . 7 to the Company’s Registration Statement dated December30, 2009 (Registration No. 333-158703) and hereby incorporated by
reference).
*5.1
Legal
Opinion of Gersten Savage LLP.
10.1
Employment
Agreement by and between Dunn and Thomas P. Dunne (Filed as Exhibit 99.2
to Dunn's Registration Statement on Form SB-2, Amendment 2, dated April 4,1997 (File No. 000-24015) and hereby incorporated by
reference).
10.2
1997
Amended Stock Option Plan. (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1, Amendment No. 2, dated April23, 1998 (File No. 333-92406) and hereby incorporated by
reference).
10.3
Agreement,
dated May 5, 1997, by and between International Data Products, Corp. and
the U.S. Air Force, the Desktop V Contract. (Filed as Exhibit
10.13 to the Company's Registration Statement on Form S-1, Amendment No.
2, dated April 23, 1998 (File No. 333-47631) and hereby incorporated by
reference).
10.4
Employee
Stock Purchase Plan. (Filed as Exhibit 10.22 to the Company’s 10-K, dated
February 16, 1999 (File No. 000-24015) and hereby incorporated by
reference).
10.5
Employment
Agreement by and between SteelCloud, Inc. and Kevin Murphy, dated June 8,2004. (Filed as Exhibit 10.32 to the Company’s 10-K, dated January 26,2005 (File No. 000-24015) and hereby incorporated by
reference).
10.6
Employment
Agreement by and between SteelCloud, Inc. and Brian Hajost, dated June 8,2004. (Filed as Exhibit 10.33 to the Company’s 10-K, dated January 26,2005 (File No. 000-24015) and hereby incorporated by
reference).
Revised
Rent Commencement Date Agreement, dated March 16, 2005 between OTR and the
Company (Filed as Exhibit 10.36 to the Company’s 10-K, dated January 30,2006 (File No. 000-24015) and hereby incorporated by
reference).
Loan
Agreement, dated January 22, 2004, by and between SteelCloud, Inc. and
Wachovia Bank, National Association and Promissory Note
issued by SteelCloud, Inc. on March 21, 2005 to Wachovia Bank, National
Association (Filed as Exhibit 10.36 to the Company’s 10-K, dated January30, 2006 (File No. 000-24015) and hereby incorporated by
reference).
Employment
Agreement by and between SteelCloud, Inc. and Robert Richmond (Filed as
Exhibit 10.1 to the Company’s 8-K, dated September 21, 2006 (File No.
000-24015) and hereby incorporated by
reference).
Employment
Agreement as Executive Director by and between SteelCloud, Inc. and Robert
E. Frick (Filed as Exhibit 10.1 to the Company’s 8-K, dated August 31,2007 (File No. 000-24015) and hereby incorporated by
reference).
10.16
Employment
Agreement as President and Chief Executive Officer by and between
SteelCloud, Inc. and Robert E. Frick (Filed as Exhibit 10.2 to the
Company’s 8-K, dated August 31, 2007 (File No. 000-24015) and hereby
incorporated by reference).
10.17
Employment
Resignation Agreement and Release by and between SteelCloud, Inc. and
Clifton W. Sink (Filed as Exhibit 10.2 to the Company’s 8-K, dated August31, 2007 (File No. 000-24015) and hereby incorporated by
reference).
Form
of Restricted Stock Agreement (Filed as Exhibit 10.21 to the Company’s
10-K for the fiscal year ended October 31, 2008, filed with the Commission
on January 29, 2009 (File No. 000-24015), and hereby incorporated by
reference.).
Employment
Agreement as President and Chief Executive Officer by and between
SteelCloud, Inc. and Brian H. Hajost (Filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on February 5, 2009, and hereby
incorporated by reference).
10.25
Employment
Agreement Amendment by and between SteelCloud, Inc. and Kevin Murphy,
dated February 28, 2009 (filed as Exhibit 10.1 to the Company’s 8-K, filed
with the Commission on March 5, 2009, and hereby incorporated by
reference).
10.26
Business
Loan and Security Agreement dated as of July 1, 2009 by and between
SteelCloud, Inc. and Caledonia Capital Corporation (filed as Exhibit 10.1
to the Company’s 8-K, filed with the Commission on July 8, 2009, and
hereby incorporated by reference).
10.27
Secured
Promissory Note issued on July 1, 2009 by SteelCloud, Inc. to Caledonia
Capital Corporation (filed as Exhibit 10.2 to the Company’s 8-K, filed
with the Commission on July 8, 2009, and hereby incorporated by
reference).
Warrant
issued on July 1, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.3 to the Company’s 8-K, filed with the
Commission on July 8, 2009, and hereby incorporated by
reference).
10.29
Asset
Purchase Agreement dated July 16, 2009, by and between SteelCloud, Inc.
and NCS Technologies, Inc. (filed as Exhibit 10.1 to the Company’s 8-K,
filed with the Commission on July 16, 2009, and hereby incorporated by
reference).
Amendment
to engagement letter dated October 28, 2009, by and between SteelCloud,
Inc. and Westminster, a division of Hudson Securities, Inc. (Filed as
Exhibit 10.30.1 to Amendment No. 6 to the Company’s Registration Statement
dated October 29, 2009 (Registration No. 333-158703) and hereby
incorporated by reference)
10.30.2
Amendment
to engagement letter dated December 29, 2009, by and between SteelCloud,
Inc. and Westminster, a division of Hudson Securities, Inc. (Filed as
Exhibit 10.30.2 to Amendment No. 7 to the Company’s Registration Statement
dated December 30, 2009 (Registration No. 333-158703) and hereby
incorporated by reference).
Revolving
Line of Credit Promissory Note issued on November 3, 2009 by SteelCloud,
Inc. to Caledonia Capital Corporation (filed as Exhibit 10.2 to the
Company’s 8-K, filed with the Commission on November 9, 2009, and hereby
incorporated by reference).
10.33
Warrant
issued on November 4, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.3 to the Company’s 8-K, filed with the
Commission on November 9, 2009, and hereby incorporated by
reference).
10.34
Warrant
issued on November 23, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.1 to the Company’s 8-K, filed with the
Commission on November 23, 2009, and hereby incorporated by
reference).
10.35
Allonge
to Note dated as of December 29, 2009 by and between SteelCloud, Inc. and
Caledonia Capital Corporation (filed as Exhibit 10.1 to the Company’s 8-K,
filed with the Commission on January 5, 2010, and hereby incorporated by
reference).
10.36
Purchase
and Sale Agreement by and between SteelCloud, Inc. and Global Technology
Partners, Inc., dated January 11, 2010 (filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on January 15, 2010, and hereby
incorporated by reference).
10.37
Release
of Lien by and between SteelCloud, Inc. and Caledonia Capital Corporation,
dated January 8, 2010 (filed as Exhibit 10.2 to the Company’s 8-K, filed
with the Commission on January 15, 2010, and hereby incorporated by
reference).
10.38
Lease
Agreement, dated February 2, 2010, by and between SteelCloud, Inc. and
Merritt-AB5, LLC (filed as Exhibit 19.38 to the Company’s 10-K, filed with
the Commission on February 5, 2010, and hereby incorporated by
reference).
*23.1
Consent
of Grant Thornton LLP, Independent Registered Public Accounting
Firm.
*23.2
Consent
of Gersten Savage LLP (incorporated in Exhibit 5.1).
99.1
Correspondence
from Kevin Murphy dated November 18 , 2009 (filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on November 23, 2009, and hereby
incorporated by reference)
*Filed
herewith
II-5
Item
17.
Undertakings.
Insofar
as indemnification by the registrant for liabilities arising under the
Securities Act, may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions referenced in Item 14 of this
registration statement, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act, and will be governed by the final
adjudication of such issue.
The
undersigned registrant hereby undertakes:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
2. That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and this offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
3. To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of this
offering;
4. For
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective;
5. For
the purpose of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
6. That,
for the purpose of determining liability of the registrant under the Securities
Act to any purchaser in the initial distribution of the securities, the
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) any
preliminary prospectus or prospectus of an undersigned registrant relating to
this offering required to be filed pursuant to Rule 424;
(ii) any
free writing prospectus relating to this offering prepared by, or on behalf of,
the undersigned registrant or used or referred to by the undersigned
registrant;
(iii) the
portion of any other free writing prospectus relating to this offering
containing material information about an undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
II-6
(iv) any
other communication that is an offer in this offering made by the undersigned
registrant to the purchaser.
7. The
undersigned registrant hereby undertakes to file, during any period in which
offers or sales are being made, a supplement to the prospectus included in this
Registration Statement which sets forth, with respect to a particular offering,
the specific number of shares of common stock to be sold, the name of the
holder, the sales price, the name of any participating broker, dealer,
underwriter or agent, any applicable commission or discount and any other
material information with respect to the plan of distribution not previously
disclosed.
8.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-7
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
has duly caused this Amendment No. 9 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Ashburn, State of Virginia on March 16, 2010.
STEELCLOUD,
INC.
/s/
Brian H. Hajost
Brian
H. Hajost
Chief
Executive Officer
Pursuant
to the requirements of the Securities Act of 1933, this Amendment No. 9 to the
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Form
of Placement Agent Warrant. (Filed as Exhibit 4.3 to Amendment
No. 5 to the Company’s Registration Statement dated October 23, 2009
(Registration No. 333-158703) and hereby incorporated by
reference).
4.3.1
Amended
Form of Placement Agent Warrant. (Filed as Exhibit 4.3.1 to
Amendment No. 6 to the Company’s Registration Statement dated October 29,2009 (Registration No. 333-158703) and hereby incorporated by
reference).
4.3.2
Amendment
No. 2 to Form of Placement Agent Warrant (Filed as Exhibit 4.3.2 to
Amendment No . 7 to the Company’s Registration Statement dated December30, 2009 (Registration No. 333-158703) and hereby incorporated by
reference).
*5.1
Legal
Opinion of Gersten Savage LLP.
10.1
Employment
Agreement by and between Dunn and Thomas P. Dunne (Filed as Exhibit 99.2
to Dunn's Registration Statement on Form SB-2, Amendment 2, dated April 4,1997 (File No. 000-24015) and hereby incorporated by
reference).
10.2
1997
Amended Stock Option Plan. (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1, Amendment No. 2, dated April23, 1998 (File No. 333-92406) and hereby incorporated by
reference).
10.3
Agreement,
dated May 5, 1997, by and between International Data Products, Corp. and
the U.S. Air Force, the Desktop V Contract. (Filed as Exhibit
10.13 to the Company's Registration Statement on Form S-1, Amendment No.
2, dated April 23, 1998 (File No. 333-47631) and hereby incorporated by
reference).
10.4
Employee
Stock Purchase Plan. (Filed as Exhibit 10.22 to the Company’s 10-K, dated
February 16, 1999 (File No. 000-24015) and hereby incorporated by
reference).
10.5
Employment
Agreement by and between SteelCloud, Inc. and Kevin Murphy, dated June 8,2004. (Filed as Exhibit 10.32 to the Company’s 10-K, dated January 26,2005 (File No. 000-24015) and hereby incorporated by
reference).
10.6
Employment
Agreement by and between SteelCloud, Inc. and Brian Hajost, dated June 8,2004. (Filed as Exhibit 10.33 to the Company’s 10-K, dated January 26,2005 (File No. 000-24015) and hereby incorporated by
reference).
Revised
Rent Commencement Date Agreement, dated March 16, 2005 between OTR and the
Company (Filed as Exhibit 10.36 to the Company’s 10-K, dated January 30,2006 (File No. 000-24015) and hereby incorporated by
reference).
Loan
Agreement, dated January 22, 2004, by and between SteelCloud, Inc. and
Wachovia Bank, National Association and Promissory Note
issued by SteelCloud, Inc. on March 21, 2005 to Wachovia Bank, National
Association (Filed as Exhibit 10.36 to the Company’s 10-K, dated January30, 2006 (File No. 000-24015) and hereby incorporated by
reference).
Employment
Agreement by and between SteelCloud, Inc. and Robert Richmond (Filed as
Exhibit 10.1 to the Company’s 8-K, dated September 21, 2006 (File No.
000-24015) and hereby incorporated by
reference).
Employment
Agreement as Executive Director by and between SteelCloud, Inc. and Robert
E. Frick (Filed as Exhibit 10.1 to the Company’s 8-K, dated August 31,2007 (File No. 000-24015) and hereby incorporated by
reference).
10.16
Employment
Agreement as President and Chief Executive Officer by and between
SteelCloud, Inc. and Robert E. Frick (Filed as Exhibit 10.2 to the
Company’s 8-K, dated August 31, 2007 (File No. 000-24015) and hereby
incorporated by reference).
10.17
Employment
Resignation Agreement and Release by and between SteelCloud, Inc. and
Clifton W. Sink (Filed as Exhibit 10.2 to the Company’s 8-K, dated August31, 2007 (File No. 000-24015) and hereby incorporated by
reference).
Form
of Restricted Stock Agreement (Filed as Exhibit 10.21 to the Company’s
10-K for the fiscal year ended October 31, 2008, filed with the Commission
on January 29, 2009 (File No. 000-24015), and hereby incorporated by
reference.).
Employment
Agreement as President and Chief Executive Officer by and between
SteelCloud, Inc. and Brian H. Hajost (Filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on February 5, 2009, and hereby
incorporated by reference).
10.25
Employment
Agreement Amendment by and between SteelCloud, Inc. and Kevin Murphy,
dated February 28, 2009 (filed as Exhibit 10.1 to the Company’s 8-K, filed
with the Commission on March 5, 2009, and hereby incorporated by
reference).
10.26
Business
Loan and Security Agreement dated as of July 1, 2009 by and between
SteelCloud, Inc. and Caledonia Capital Corporation (filed as Exhibit 10.1
to the Company’s 8-K, filed with the Commission on July 8, 2009, and
hereby incorporated by reference).
10.27
Secured
Promissory Note issued on July 1, 2009 by SteelCloud, Inc. to Caledonia
Capital Corporation (filed as Exhibit 10.2 to the Company’s 8-K, filed
with the Commission on July 8, 2009, and hereby incorporated by
reference).
Warrant
issued on July 1, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.3 to the Company’s 8-K, filed with the
Commission on July 8, 2009, and hereby incorporated by
reference).
10.29
Asset
Purchase Agreement dated July 16, 2009, by and between SteelCloud, Inc.
and NCS Technologies, Inc. (filed as Exhibit 10.1 to the Company’s 8-K,
filed with the Commission on July 16, 2009, and hereby incorporated by
reference).
Amendment
to engagement letter dated October 28, 2009, by and between SteelCloud,
Inc. and Westminster, a division of Hudson Securities, Inc. (Filed as
Exhibit 10.30.1 to Amendment No. 6 to the Company’s Registration Statement
dated October 29, 2009 (Registration No. 333-158703) and hereby
incorporated by reference)
10.30.2
Amendment
to engagement letter dated December 29, 2009, by and between SteelCloud,
Inc. and Westminster, a division of Hudson Securities, Inc. (Filed as
Exhibit 10.30.2 to Amendment No. 7 to the Company’s Registration Statement
dated December 30, 2009 (Registration No. 333-158703) and hereby
incorporated by reference).
Revolving
Line of Credit Promissory Note issued on November 3, 2009 by SteelCloud,
Inc. to Caledonia Capital Corporation (filed as Exhibit 10.2 to the
Company’s 8-K, filed with the Commission on November 9, 2009, and hereby
incorporated by reference).
10.33
Warrant
issued on November 4, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.3 to the Company’s 8-K, filed with the
Commission on November 9, 2009, and hereby incorporated by
reference).
10.34
Warrant
issued on November 23, 2009 by SteelCloud, Inc. to Caledonia Capital
Corporation (filed as Exhibit 10.1 to the Company’s 8-K, filed with the
Commission on November 23, 2009, and hereby incorporated by
reference).
10.35
Allonge
to Note dated as of December 29, 2009 by and between SteelCloud, Inc. and
Caledonia Capital Corporation (filed as Exhibit 10.1 to the Company’s 8-K,
filed with the Commission on January 5, 2010, and hereby incorporated by
reference).
10.36
Purchase
and Sale Agreement by and between SteelCloud, Inc. and Global Technology
Partners, Inc., dated January 11, 2010 (filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on January 15, 2010, and hereby
incorporated by reference).
10.37
Release
of Lien by and between SteelCloud, Inc. and Caledonia Capital Corporation,
dated January 8, 2010 (filed as Exhibit 10.2 to the Company’s 8-K, filed
with the Commission on January 15, 2010, and hereby incorporated by
reference).
10.38
Lease
Agreement, dated February 2, 2010, by and between SteelCloud, Inc. and
Merritt-AB5, LLC (filed as Exhibit 19.38 to the Company’s 10-K, filed with
the Commission on February 5, 2010, and hereby incorporated by
reference).
*23.1
Consent
of Grant Thornton LLP, Independent Registered Public Accounting
Firm.
*23.2
Consent
of Gersten Savage LLP (incorporated in Exhibit 5.1).
99.1
Correspondence
from Kevin Murphy dated November 18 , 2009 (filed as Exhibit 10.1 to the
Company’s 8-K, filed with the Commission on November 23, 2009, and hereby
incorporated by reference)
*Filed
herewith
II-10
Dates Referenced Herein and Documents Incorporated by Reference