UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 10-Q





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2009





OR





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from    to





COMMISSION FILE NUMBER 000-50813








St. Bernard Software, Inc.


(Exact name of registrant as specified in its charter)





Delaware
20-0996152(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)





15015 Avenue of Science, San Diego, CA 92128


(Address of principal executive offices)





(858) 676-2277


(Registrant’s telephone number, including area code)




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days.





Yes þ
No  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).


Yes o
No 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  ̈
Accelerated filer  ̈
Non-accelerated filer  ̈
Smaller Reporting Company þ




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes  ̈
No þ




The registrant had 13,319,991 shares of its common stock, par value $0.01 per share, outstanding at August 14, 2009.







ST. BERNARD SOFTWARE, INC.





INDEX TO FORM 10-Q







PagePART I — FINANCIAL INFORMATIONITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
1CONSOLIDATED BALANCE SHEETS  AS OF JUNE 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008
1UNAUDITED CONSOLIDATED STATEMENTS OF INCOME  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
2UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE  SIX MONTHS ENDED JUNE 30, 2009
3UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
4NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
13ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
23ITEM 4T.
CONTROLS AND PROCEDURES
23PART II — OTHER INFORMATIONITEM 1.
LEGAL PROCEEDINGS
24ITEM 1A.
RISK FACTORS
24ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
24ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
24ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
24ITEM 5.
OTHER INFORMATION
25ITEM 6.
EXHIBITS
25









PART I – FINANCIAL INFORMATION





Item 1. Consolidated Financial Statements





St. Bernard Software, Inc.Consolidated Balance SheetsJune 30,2009


December 31,2008(Unaudited)AssetsCurrent AssetsCash and cash equivalents

$
1,051,000


$
2,051,000Accounts receivable - net of allowance for doubtful accounts of$25,000 and $52,000 at June 30, 2009 and December 31, 2008,respectively


2,706,000



3,170,000Inventories - net


430,000



364,000Prepaid expenses and other current assets


378,000



381,000Total current assets


4,565,000



5,966,000Fixed Assets - Net


708,000



828,000Other Assets


627,000



281,000Goodwill


7,568,000



7,568,000Total Assets

$
13,468,000


$
14,643,000Liabilities and Stockholders’ DeficitCurrent LiabilitiesShort-term borrowings

$
2,225,000


$
2,462,000Accounts payable


1,201,000



1,270,000Accrued compensation expenses


840,000



1,361,000Accrued expenses and other current liabilities


586,000



518,000Warranty liability


184,000



195,000Current portion of capitalized lease obligations


88,000



147,000Deferred revenue


10,060,000



10,469,000Total current liabilities


15,184,000



16,422,000Deferred Rent


59,000



118,000Capitalized Lease Obligations, Less Current Portion


-



22,000Deferred Revenue


7,344,000



7,152,000Total liabilities


22,587,000



23,714,000Stockholders’ DeficitPreferred stock, $0.01 par value; 5,000,000 sharesauthorized; no shares issued and outstanding


-



-Common stock, $0.01 par value; 50,000,000 shares authorized;14,838,940 and 14,783,090 shares issued and outstanding atJune 30, 2009 and December 31, 2008, respectively


148,000



148,000Additional paid-in capital


40,796,000



40,308,000Accumulated deficit


(50,063,000
)


(49,527,000
)Total stockholders’ deficit


(9,119,000
)


(9,071,000
)Total Liabilities and Stockholders’ Deficit

$
13,468,000


$
14,643,000


The accompanying notes are an integral part of these consolidated financial statements.


1




St. Bernard Software, Inc.Unaudited Consolidated Statements of OperationsThree months ended June 30,


Six months ended June 30,2009


2008


2009


2008RevenuesSubscription

$
3,692,000


$
3,427,000


$
7,381,000


$
6,731,000Appliance


1,062,000



1,161,000



1,816,000



1,762,000License


-



12,000



6,000



16,000Total Revenues


4,754,000



4,600,000



9,203,000



8,509,000Cost of RevenuesSubscription


549,000



557,000



1,123,000



1,113,000Appliance


696,000



811,000



1,232,000



1,236,000License


-



4,000



2,000



5,000Total Cost of Revenues


1,245,000



1,372,000



2,357,000



2,354,000Gross Profit


3,509,000



3,228,000



6,846,000



6,155,000Operating ExpensesSales and marketing


1,581,000



2,065,000



3,241,000



3,881,000Research and development


870,000



746,000



1,905,000



1,499,000General and administrative


1,053,000



1,377,000



2,247,000



2,575,000Total Operating Expenses


3,504,000



4,188,000



7,393,000



7,955,000Income (Loss) from Operations


5,000



(960,000
)


(547,000
)


(1,800,000
)Other IncomeInterest expense - net


79,000



157,000



171,000



300,000Gain on sale of assets


-



-



-



(320,000
)Other income


(22,000
)


(180,000
)


(38,000
)


(444,000
)Total Other Expense (Income)


57,000



(23,000
)


133,000



(464,000
)Loss Before Income Taxes


(52,000
)


(937,000
)


(680,000
)


(1,336,000
)Income tax expense


-



(3,000
)


(5,000
)


(3,000
)Net Loss

$
(52,000
)

$
(940,000
)

$
(685,000
)

$
(1,339,000
)Loss Per Common Share - Basic and Diluted

$
(0.00
)

$
(0.06
)

$
(0.05
)

$
(0.09
)Weighted Average Shares Outstanding


14,838,940



14,772,367



14,838,322



14,772,096




The accompanying notes are an integral part of these consolidated financial statements.
  2




St. Bernard Software, Inc.Unaudited Consolidated Statement of Stockholders' DeficitAdditionalCommon Stock


Paid-in


AccumulatedShares


Amount


Capital


Deficit


TotalBalance at December 31, 2008


14,783,090


$
148,000


$
40,308,000


$
(49,527,000
)

$
(9,071,000
)Cumulative effect of change in accounting principle


-



-



(190,000
)


149,000



(41,000
)Common stock issued under the employee stock purchase plan


55,850



-



9,000



-



9,000Stock-based compensation expense


-



-



669,000



-



669,000Net loss


-



-



-



(685,000
)


(685,000
)Balance at June 30, 2009


14,838,940


$
148,000


$
40,796,000


$
(50,063,000
)

$
(9,119,000
)





The accompanying notes are an integral part of these consolidated financial statements.




3




St. Bernard Software, Inc.Unaudited Consolidated Statements of Cash FlowsSix months ended June 30,2009


2008Cash Flows From Operating ActivitiesNet loss

$
(685,000
)

$
(1,339,000
)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization


196,000



321,000Allowance for doubtful accounts


(27,000
)


11,000Gain on sale of assets


-



(320,000
)Gain on change in fair value of warrant derivative liability


(16,000
)


-Stock-based compensation expense


669,000



334,000Noncash interest expense


77,000



122,000Increase (decrease) in cash resulting from changes in:Accounts receivable


491,000



(525,000
)Inventories


(66,000
)


(187,000
)Prepaid expenses and other assets


(420,000
)


38,000Accounts payable


(69,000
)


(911,000
)Accrued expenses and other current liabilities


(499,000
)


(275,000
)Deferred rent


(38,000
)


51,000Warranty liability


(11,000
)


33,000Deferred revenue


(217,000
)


582,000Net cash used in operating activities


(615,000
)


(2,065,000
)Cash Flows From Investing ActivitiesPurchases of fixed assets


(76,000
)


(4,000
)Proceeds from the sale of assets


-



320,000Net cash provided (used) by investing activities


(76,000
)


316,000Cash Flows From Financing ActivitiesProceeds from the sales of stock under the employee stock purchase plan


9,000



6,000Principal payments on capitalized lease obligations


(81,000
)


(74,000
)Net (decrease) increase in short-term borrowings


(237,000
)


896,000Net cash (used) provided by financing activities


(309,000
)


828,000Net Decrease in Cash and Cash Equivalents


(1,000,000
)


(921,000
)Cash and Cash Equivalents at Beginning of Period


2,051,000



1,297,000Cash and Cash Equivalents at End of Period

$
1,051,000


$
376,000Supplemental Disclosures of Cash Flow Information:Cash paid during the period for:Interest

$
71,000


$
190,000Income taxes

$
3,000


$
-
  Non Cash Investing and Financing Activities:
  In January 2009, the Company reclassified 463,500 warrants with an estimated fair value of $41,000 from equity to warrant derivative liability.
  In July 2008, the Company issued warrants to purchase up to 450,000 shares of the Company's common stock in connection with a loan agreement. Deferred debt
issuance costs of $125,000 were recorded based on the estimated fair value of the warrants. See Note 3.
  In January 2008, the Company issued warrants to purchase up to 140,350 shares of the Company's common stock in connection with the amendment of a loan agreement. Deferred
debt issuance costs of $58,000 were recorded based on the estimated fair value of the warrants. See Note 3.
  In January 2008, the Company issued warrants to purchase up to 463,500 shares of the Company's common stock in connection with a loan agreement. Debt discount of $151,000
was recorded based on the estimated relative fair value of the warrants. See Note 3.


The accompanying notes are an integral part of these consolidated financial statements.
  4




St. Bernard Software, Inc.





Notes to Consolidated Financial Statements


1. Summary of Significant Accounting Policies
  St. Bernard Software, Inc., a Delaware corporation (“we,” “us,”  “our,” the “Company,” or “St. Bernard”) is a software development company that designs, develops, and markets Secure Content
Management (“SCM”) and policy compliance solutions to small, medium, and enterprise class customers. The Company sells its products through distributors, dealers, and original equipment manufacturers (“OEMs”), and directly to network managers and administrators worldwide.
 
 Basis of presentation
  The consolidated balance sheet as of June 30, 2009, the consolidated statements of operations for the three and six months ended June 30, 2009 and 2008, the consolidated statement of stockholders’ deficit for the six months ended June 30, 2009, and the consolidated statements of cash flows for the six months
ended June 30, 2009 and 2008, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X.  The interim financial statements reflect all adjustments which are, in the opinion of management, necessary to make the financial statements not misleading. The consolidated balance sheet as of December 31, 2008 was derived from the Company’s
audited financial statements. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2009. These consolidated financial statements should be read in conjunction with the Company’s December 31, 2008 consolidated financial statements and notes thereto included in the Company’s Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 11, 2009.
  Use of estimates
  The preparation of the consolidated financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates
used in preparing the consolidated financial statements include those assumed in computing revenue recognition, the allowance for doubtful accounts, warranty liability, the valuation allowance on deferred tax assets, testing goodwill for impairment, and stock-based compensation.
  Liquidity
  As of June 30, 2009, the Company had approximately $1.1 million in cash and cash equivalents and a working capital deficit of $10.6 million.  Approximately $10.1 million of our current liability balance at June 30, 2009 consisted of deferred revenues, which represents amounts that are expected to be amortized
into revenue as they are earned in future periods. The Company also had a stockholders’ deficit of approximately $9.1 million at June 30, 2009.
  The Company has a history of losses and has not yet been able to achieve profitability. For the three and six months ended June 30, 2009, the Company incurred net losses of $52,000 and $685,000, respectively, and through June 30, 2009 and 2008 has recorded a cumulative net loss of $50.1 million and $49.5 million,
respectively. Losses (income) from operations decreased from a loss of $960,000 in the second quarter of 2008 to an income of $5,000 in the respective period in 2009. In an effort to achieve profitability, the Company has made and continues to make substantial changes to the cost structure of its business. These changes include reducing headcount to be in line with the current size of its business, renegotiating vendor contracts, and refocusing its marketing strategy around its core business. During February
2009, the Company also extended to May 15, 2010 the maturity date of the Loan and Security Agreement (the “SVB Loan Agreement”) with Silicon Valley Bank (“SVB”) and also negotiated a significant reduction in the interest rate.
  5
  St. Bernard Software, Inc.
 
 Notes to Consolidated Financial Statements (Continued)
 The Company believes that its existing cash resources, combined with projected collections on billings, reduced expenditures based on implemented cost reductions, and borrowing availability under existing credit facilities, will provide sufficient liquidity for the Company to meet its continuing obligations for
the next twelve months. However, there can be no assurances that projected revenue will be achieved or the improvement in operating results will occur. In the event cash flow from operations is not sufficient, the Company may require additional sources of financing in order to maintain its current operations. These additional sources of financing may include public or private offerings of equity or debt securities. Whereas management believes it will have access to these financing sources, no assurance can be
given that additional sources of financing will be available on acceptable terms, on a timely basis, or at all.
  Loss per common share
  Basic loss per common share is calculated by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share includes the components of basic loss per common share and also gives effect to dilutive common stock equivalents.
Potentially dilutive common stock equivalents include stock options and warrants (See Notes 2 and 4). No dilutive effect was calculated for the three and six months ended June 30, 2009 and 2008 as the Company reported a net loss in each period and the effect would have been anti-dilutive.
  New accounting standards
  In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS No. 168”). Through SFAS No. 168, the FASB confirmed that the FASB Accounting Standards Codification (the “Codification”) will become the single official source of authoritative US generally accepted accounting principles (“US GAAP”) (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force (“EITF”), and related literature. After the effective date of the Codification,
only one level of authoritative US GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change US GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification becomes effective for interim and annual periods ending on or after September 15, 2009. The Company will apply the Codification beginning in the quarter ending September 30, 2009. The adoption of the Codification will not have
an effect on the Company’s financial statements, but will impact the Company’s future financial statement disclosures since all future references to authoritative accounting literature will be referenced in accordance with the Codification.
  In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”).  This statement establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but
before financial statements are issued or are available to be issued.  This statement requires an entity to apply the requirements to interim or annual financial periods ending after June 15, 2009. The Company has adopted the provisions of SFAS 165 for the quarter ended June 30, 2009.  The adoption of these provisions did not have a material impact on its financial position, cash flows, or results of operations.
  In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”
(“FSP FAS 157-4”), which provides additional guidance for estimating fair value in accordance with SFAS 157.  The Company adopted the provisions of FSP FAS 157-4 for the quarter ended June 30, 2009.  The adoption of FSP FAS 157-4 did not have a material impact on its consolidated financial position, cash flows, or results of operations.
  In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”), which provides new guidance on the recognition of other-than-temporary impairments
of investments in debt securities and provides new presentation and disclosure requirements for other-than-temporary impairments of investments in debt and equity securities.  FSP FAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009; early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of FSP FAS 115-2 for the quarter ended June 30, 2009. The adoption of FSP FAS 115-2 did not have a material impact on its consolidated
financial position, cash flows, or results of operations.
  6
  St. Bernard Software, Inc.

Notes to Consolidated Financial Statements (Continued)
 
 In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,“Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”).  FSP FAS 107-1 amends SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments” to require disclosures about fair value of financial instruments in interim reporting periods.  Such disclosures were previously required only in annual financial statements.  FSP FAS 107-1 is effective for interim reporting periods ending after June 15, 2009; early adoption permitted for periods ending after March 15, 2009.  The Company adopted the provisions of FSP FAS 107-1 for the quarter ended June 30, 2009.  The
adoption of FSP FAS 107-1 did not have a material impact on its consolidated financial position, cash flows, or results of operations.
  In June 2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock” (“EITF 07-5”). EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Paragraph 11(a) of SFAS No. 133 - specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company's own stock and (b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. The Company’s adoption of EITF 07-5 effective January 1, 2009, resulted in the identification of 463,500 warrants that were determined to be ineligible for equity classification because of certain provisions that may result in an adjustment to their exercise price, and accordingly, the estimated fair value of the warrants as of January 1, 2009 was
reclassified to a liability and a cumulative effect adjustment was recorded based on the difference between amounts recognized in the consolidated balance sheet before and after the initial adoption of EITF 07-5.  In addition, the change in the estimated fair value of the warrants was recognized in the statement of operations for the three and six months ended June 30, 2009 (See Note 5).
  In September 2006, FASB issuedSFAS No. 157, “Fair Value Measurements”(“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value
in U.S. GAAP, and expands disclosures about fair value measurements. This statement applies in those instances where other accounting pronouncements require or permit fair value measurements and the Board has previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change the current practice. In February 2008,
the FASB issued FSP FAS 157-2 which defers the effective date of SFAS 157 for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequent recurring basis, until years beginning after November 15, 2008.  The Company’s adoption of SFAS 157 for its financial assets and liabilities on January 1, 2008 and FSP FAS 157-2 during the first quarter of 2009 for its non-financial assets and liabilities did not have a material impact on the
Company’s consolidated financial position, cash flows, or results of operations.
  Reclassifications
  Certain prior year reclassifications have been made for consistent presentation. These reclassifications have no effect on previously reported net income.
  2. Stock-based Compensation Expense
  Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards, or SFAS, No. 123R (revised 2004), “Share-based Payment”(“SFAS 123R”) using the modified
prospective method. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 are based upon the grant date fair value estimated in accordance with SFAS 123R.
  7
  St. Bernard Software, Inc.
 
 Notes to Consolidated Financial Statements (Continued)
  The Company has non-qualified and incentive stock option plans (together, the “Plans”) providing for the issuance of options to employees and others as deemed appropriate by the Board of Directors. Terms of options issued under the Plans include an exercise price equal to the estimated fair value (as
determined by the Board of Directors) at the date of grant, vesting periods generally between three and five years, and expiration dates not to exceed ten years from the date of grant. The determination of fair value of the Company’s stock is derived using the stock price at the grant date.
  Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected life of the stock options granted, the expected stock price volatility factor, and the pre-vesting option forfeiture rate. The fair value of options granted during the quarters ended June 30,
2009 and 2008 was calculated using the Black-Scholes option pricing model using the valuation assumptions in the table below. The Company estimates the expected life of stock options granted based upon management’s consideration of the historical life of the options and the vesting and contractual period of the options granted. The Company estimates the expected volatility factor based on the weighted average of the historical volatility of three publicly traded surrogates of the Company and the Company’s
implied volatility from its common stock price. The Company applies its risk-free interest rate based on the U.S. Treasury yield in effect at the time of the grant. The Company has no history or expectation of paying any cash dividends on its common stock.  Forfeitures were estimated based on historical experience.
 
 Six Months
Ended


Six Months
EndedJune 30, 2009


June 30, 2008Average expected life (years)


6.5



6.5Average expected volatility factor


79.6
%


73.3
%Average risk-free interest rate


2.8
%


3.8
%Average expected dividend yield


0



0
  Total stock-based compensation expense was approximately $313,000 and $277,000 for the three months ended June 30, 2009 and 2008, respectively, and $669,000 and $334,000 for the six months ended June 30, 2009 and 2008, respectively. The stock-based compensation expenses were charged to operating expenses. The effect
on loss per share as a result of the stock based compensation expense was approximately $0.02 for the three month ended June 30, 2009 and 2008, and $0.5 and $0.2 for the six months ended June 30, 2009 and 2008, respectively. The tax effect was immaterial.
  The following is a summary of stock option activity under the Plans as of December 31, 2008 and changes during the six months ended June 30, 2009:
 
 Number of
Shares
Outstanding


Weighted
Average
Exercise
PriceOptions outstanding at December 31, 2008


2,562,976


$
1.29Granted


205,000


$
0.15Exercised


—


$
—Forfeited


(929,571
)

$
0.25Options outstanding at June 30, 2009


1,838,405


$
0.24Options vested and expected to vest at June 30, 2009


1,574,270


$
0.24Options exercisable at June 30, 2009


825,215


$
0.25
  8
 St. Bernard Software, Inc.
 
 Notes to Consolidated Financial Statements (Continued)
   On February 9, 2009, the Board of Directors of St. Bernard approved an amendment to its outstanding non-qualified stock option grants issued by St. Bernard to all current employees and directors under its 2005 Stock Plan reducing the exercise price of the unexercised stock options to the fair market price of St. Bernard’s common stock on the
close of business on February 10, 2009 of $0.25 per share. The intention of St. Bernard’s Board of Directors in approving the amendment was to reestablish the incentive and retentive value of the stock options for the affected employees and directors, as all of the relevant options had been left significantly “out-of-the-money” due to recent declines in the price of St. Bernard’s common stock. The amendment affected options to purchase a total of up to 1,787,999 shares with a weighted
average price per share of approximately $1.09 of St. Bernard common stock, including options granted to executive officers and directors of the Company. The amendment to the options did not change any other terms of the original option grants. In accordance with the provisions of SFAS 123R, the reduction of the option exercise price is being accounted for as a modification of the original award.  Accordingly, incremental compensation cost of approximately $85,000, determined based on the difference
between the fair value of the modified award over the fair value of the original award immediately before the modification, will be recognized over the remaining vesting period of the grant.
  Additional information regarding options outstanding as of June 30, 2009 is as follows:
 
 Exercise
Prices


Number of
Shares
Outstanding

Weighted
Average
Remaining
Contractual
Life in Years

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price$0.15



192,000

9.76

$
0.15

9,166

$
0.15$0.18



1,500

9.88


0.18

—


—$0.19



6,500

9.52


0.19

—


—$0.25



1,638,405

7.16


0.25

816,049


0.251,838,405

7.44

$
0.24

825,215

$
0.25
 
 The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2009 was approximately $0. The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2008 was approximately $0, respectively. The aggregate intrinsic value represents the total intrinsic value based upon the stock price of $0.22 at
June 30, 2009.
  As of June 30, 2009, there was approximately $895,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the option plans. The cost is expected to be recognized over a weighted average period of 2.04 years.
  3. Credit Facilities
  Silicon Valley Bank
  On May 15, 2007, the Company entered into a Loan and Security Agreement with SVB (the “SVB Loan Agreement”) which provides for a credit facility not to exceed $2.0 million, subject to a borrowing base formula, as described below. The SVB Loan Agreement was amended on February 27, 2009 (the “SVB
Loan Amendment”). Pursuant to the terms of the SVB Loan Amendment, among other things, SVB (i) decreased the interest rate on the revolving line of credit to 3.50% (from 3%) over the greater of the prime rate or 7.5% (from 10.5%), (ii) modified the tangible net worth covenant to no less than negative seventeen million dollars ($17,000,000) at all times, increasing quarterly by fifty percent (50%) of net income and monthly by fifty percent (50%) of issuances of equity after January 31, 2009 and
the principal amount of subordinated debt received after January 31, 2009, (iii) modified the borrowing base to seventy percent (70%) of eligible accounts and the lesser of sixty percent (60%) of advanced billing accounts or six hundred thousand dollars ($600,000) as determined by SVB; provided, however, that SVB may, with notice to the Company, decrease the foregoing percentage in its good faith business judgment based on events, conditions, contingencies, or risks which, as determined by SVB, may adversely
affect collateral, and (iv) extended the revolving line maturity date to May 15, 2010. At June 30, 2009, total availability under the SVB Loan Agreement was $2.0 million, of which $1.5 million was outstanding, and the applicable interest rate was 7.5%. The Company was in compliance with the above stated covenants and restrictions. The obligations under the SVB Loan Agreement are secured by substantially all of St. Bernard’s assets.
  9
  St. Bernard Software, Inc.
 
 Notes to Consolidated Financial Statements (Continued)
   In connection with the execution of a previous SVB Loan Amendment dated January 25, 2008, St. Bernard issued warrants to SVB, which allows SVB to purchase up to 140,350 shares of St. Bernard common stock at an exercise price of $0.57 per share. The warrants expire on the seventh anniversary of their issue date.
The Company recorded deferred debt issuance costs in the amount of $58,000, based on the estimated fair value allocated to the warrants using the following assumptions; 75.35% volatility, risk free interest rate of 3.61%, an expected life of seven years and no dividends.  Amortization of the debt issuance costs, including amounts recorded as a debt discount for warrants previously issued for the three and six months ended June 30, 2009, which is being recorded as interest expense, was approximately
$23,000 and $45,000, respectively. Furthermore, St. Bernard agreed to grant SVB certain piggyback registration rights with respect to the shares of common stock underlying the warrants.
  Partners for Growth II, LP
  On July 21, 2008, the Company entered into a Loan Agreement with Partners for Growth II, LP (“PFG”) (the “PFG Loan Agreement”), which became effective on July 23, 2008 and which provides for a credit facility not to exceed $1.5 million. The PFG Loan Agreement was subsequently amended on February
27, 2009. The annual interest rate on the PFG Loan is set at the Prime Rate, quoted by SVB as its Prime Rate from time to time, plus 3% (the “Applicable Rate”).  At June 30, 2009, the effective interest rate was 7%. The PFG Loan Agreement will terminate on July 20, 2010, on which date all principal, interest and other outstanding monetary obligations must be repaid to PFG. The obligations under the PFG Loan Agreement are secured by a security interest in collateral comprised of substantially
all of St. Bernard’s assets, subordinated to the SVB Loan Agreement.
  The PFG Loan Agreement contains affirmative, negative and financial covenants customary for credit facilities of this type, including, among other things, limitations on indebtedness, liens, sales of assets, mergers, investments, and dividends.  The PFG Loan Agreement also requires that St. Bernard maintain
a Modified Net Income (as defined in the PFG Loan Agreement) greater than zero. PFG eliminated the Modified Net Income covenant for the reporting periods ending February 28, 2009 and March 31, 2009. The PFG Loan Agreement contains events of default customary for credit facilities of this type (with customary grace or cure periods, as applicable) and provides that upon the occurrence and during the continuance of an event of default, among other things, the interest rate on all borrowings will be increased, the
payment of all borrowings may be accelerated, PFG’s commitments may be terminated and PFG shall be entitled to exercise all of its rights and remedies, including remedies against collateral.  At June 30, 2009, the Company was in compliance with the above stated covenants.
  In connection with the execution of the PFG Loan Agreement, St. Bernard received approximately $1,000 from PFG, and as a result, issued a warrant to PFG on July 21, 2008 (the “Warrant”), which allows PFG to purchase up to 450,000 shares of St. Bernard common stock at an exercise price equal to $0.46
per share. The Warrant expires on July 20, 2013.  The Company recorded deferred debt issuance costs in the amount of $125,000, based on the estimated fair value allocated to the warrants using the following assumptions; 69.07% volatility, risk free interest rate of 4.09%, an expected life of five years and no dividends. Amortization of the debt issuance costs for the three and six months ended June 30, 2009, which is being recorded as interest expense, was approximately $16,000 and $31,000, respectively.
As of June 30, 2009, the balance on the PFG Loan Agreement was $750,000.
  4. Warrants
  As of June 30, 2009 and December 31, 2008, a total of 9,373,850 shares of common stock, respectively, were reserved for issuance for the exercise of warrants at exercise prices ranging from $0.46 to $5.00 per share.  During the year ended December 31, 2008, warrants to purchase an aggregate of 1,053,850 shares
of common stock at exercise prices of $0.46 to $0.57 per share were granted in connection with the loan agreements described in Note 3 above and 430,104 warrants expired at December 31, 2008. There were no warrants that were granted, exercised, or expired during the six months ended June 30, 2009.
  10
  St. Bernard Software, Inc.
 
 Notes to Consolidated Financial Statements (Continued)
 5.Warrant Derivative Liability
  Effective January 1, 2009, upon the adoption of EITF 07-5, the Company reclassified 463,500 outstanding warrants that were previously classified as equity to a derivative liability.  This reclassification was necessary as the Company determined that certain terms included in these warrant agreements provided
for a possible future adjustment to the warrant exercise price, and accordingly, under the provisions of EITF 07-5, these warrants did not meet the criteria for being considered to be indexed to the Company’s stock.  As such, these warrants no longer qualified for the exception to derivative liability treatment provided for in paragraph 11(a) of SFAS No. 133.  The estimated fair value of warrants upon reclassification at January 1, 2009 was determined to be $41,000. The cumulative
effect of the change in accounting for these warrants of $149,000 was recognized as an adjustment to the opening balance of accumulated deficit at January 1, 2009 based on the difference between the amounts recognized in the consolidated balance sheet before the initial adoption of EITF 07-5 and the amounts recognized in the consolidated balance sheet upon the initial adoption application of EITF 07-5.  The amounts recognized in the consolidated balance sheet as a result of the initial application of
EITF 07-5 on January 1, 2009 were determined based on the amounts that would have been recognized if EITF 07-5 had been applied from the issuance date of the warrants.  At June 30, 2009 the estimated fair value of the warrants, which is included in accrued expenses and other current liabilities in the accompanying balance sheet, was determined to be $25,000.  The change in the estimated fair value of the warrant derivative liability of $16,000 is included in other income in the accompanying
statement of operations for the three and six months ended June 30, 2009.
  6.  Fair Value Measurements
  Fair Value Hierarchy
 
 Fair value is defined in SFAS 157 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements are to be considered from the perspective of a market participant that holds the
assets or owes the liability.  SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
  The standard describes three levels of inputs that may be used to measure fair value:
  Level 1: Quoted prices in active markets for identical or similar assets and liabilities.
  Level 2:  Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.
  Level 3:  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
 Financial Instruments Measured at Fair Value on a Recurring Basis
 
 SFAS 157 requires disclosure of the level within the fair value hierarchy used by the Company to value financial assets and liabilities that are measured at fair value on a recurring basis. At June 30, 2009 the Company had outstanding warrants to purchase common shares of our stock that are classified as warrant
derivative liabilities with a fair value of $25,000.  The warrants are valued using Level 3 inputs because there are significant unobservable inputs associated with them.
  11
  St. Bernard Software, Inc.
 
 Notes to Consolidated Financial Statements (Continued)
  The following table reconciles the warrant derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2009:
 
 Balance at January 1, 2009

$
41,000Gain on change in fair value included in net loss


(16,000
)Balance at June 30, 2009

$
25,000
 
 Fair Value of Other Financial Instruments
  The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, credit facility agreements, capital lease agreements and warrant liability.  The fair values of cash and cash equivalent, accounts receivables, accounts payable and accrued
expenses approximate their respective carrying values due to short-term maturities of these instruments. The fair values of the Company’s obligations under its credit facility and capital lease agreements approximate their respective carrying values as the stated interest rates of these instruments reflect rates which are otherwise currently available to the Company.  The warrant liability is recorded at its estimated fair value based on a Black-Scholes option pricing model.
  7. Litigation
  In the normal course of business, the Company is occasionally named as a defendant in various lawsuits.  On March 14, 2007, a stockholder filed an action against the Company seeking money damages in the San Diego Superior Court for the County of San Diego, asserting claims of intentional misrepresentation,
negligent misrepresentation, fraudulent concealment, and negligence. The Company has successfully appealed the Superior Court's denial of its motion to compel arbitration.  Effective March 31, 2009, the Company and the stockholder entered into a Settlement Agreement, pursuant to which the parties released and forever discharged each other from any and all claims and causes of action, in connection with the Claim.  There was no cash outlay by the Company as part of the settlement and the settlement was
not material to the Company’s financial condition or operating results.
  On July 9, 2009, an action was filed in the United States District Court for the Southern District of California by Southwest Technology Innovations LLC (the “Plaintiff”) against the Company and Espion International, Inc., Workgroup Solutions, Inc., SonicWall, Inc., Mirapoint Software, Inc., and Proofpoint,
Inc., (collectively the “Defendants”).  In this matter, the Plaintiff is claiming patent infringement arising under the patent laws of the United States. The patent-in-suit is U.S. Patent No. 6,952,719 entitled “Spam Detector Defeating System” which was issued on October 4, 2005. The Plaintiff is seeking a judgment in favor of Plaintiff and is seeking an award of unspecified damages. The Company intends to vigorously defend its interests in this matter.
  8. Subsequent Events
  Subsequent event evaluation date
 
 Subsequent events have been evaluated through August 14, 2009, which represents the date the Company’s interim consolidated financial statements were issued.
 
 Reduction of outstanding common shares
 
 In connection with the merger agreement entered into in October 2005 between the Company and Sand Hill IT Security Acquisition Corp (“Sand Hill”), 1,613,999 shares of the Company’s common stock that had been issued as part of the merger consideration were placed with a stockholders’ representative
to be held on behalf of the shareholders as of the closing of the merger.  According to the merger agreement and related amendments, these shares were to be released after the merger, pro rata, to shareholders as of the closing of the merger only in the event the closing price of the Company’s stock was $8.50 or more for a specified number of days by July 25, 2009.  In the event that these conditions were not met, these shares would automatically be redeemed by Sand Hill at no cost.
Thereafter such shares would not be considered issued and outstanding for any purpose.
  As of July 25, 2009, the specified conditions were not met and the 1,613,999 shares of stock were returned.  The return of these shares in July 2009 is considered to be a non-recognized subsequent event with respect to the accompanying consolidated financial statements for the three and six months ended
June 30, 2009.  Accordingly, there has been no adjustment to the Company’s outstanding common stock as of June 30, 2009.
  12


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations




The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q. In addition to historical consolidated financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q.




OVERVIEW




Our Business




We design, develop, and market Internet security appliances and services to small, medium and enterprise class customers (SME’s). These solutions enable our customers to manage their employee usage policy across multiple messaging protocols, which include Internet access, e-mail, and IM. These solutions are
delivered in a suite of appliances, which scale to meet the needs of any size organization.




Our customers include more than 5,000 enterprises, educational institutions, small and medium businesses (SMBs), and government agencies. Customers can purchase our solutions directly from us, through our 1-tier and 2-tier reseller network, and through OEMs. Appliance purchases typically consist of an initial hardware
purchase and maintenance subscription. Our primary customers are IT managers, directors, and administrators.




Our Financial Results




We reported revenues of $4.8 million for the three months ended June 30, 2009, compared to $4.6 million in the same period in 2008, an increase of 4.3% resulting from our refocused marketing efforts and our continued effort to upsell our current customers; a net loss for the three months ended June 30, 2009 of $52,000,
compared to a net loss of $940,000 in the same period in 2008 as a result of our continued and extensive cost cutting efforts; and net basic and diluted loss per share for the three months ended June 30, 2009 of $0.00, compared to a net basic and diluted loss per share of $0.06 reported in the same period in 2008. The decrease in the basic and diluted loss per share was primarily attributable to an increase in total revenues of $154,000, coupled with a decrease in cost of revenues of $127,000 and a decrease in
operating expenses of $684,000 for the three months ended June 30, 2009 compared to the same period in 2008.




Cash used in operations was $615,000 and $2.1 million for the six months ended June 30, 2009 and 2008, respectively. The net decrease in use of cash was due primarily to changes in our operating asset and liability accounts.




On February 27, 2009, we amended our line of credit agreement with SVB which was established on May 15, 2007. See section below titled “Credit Facilities” for the terms of the original and amended agreement with SVB. The outstanding balance on the line of credit with SVB was $1.5 million as of June 30,
2009.




We also amended our Loan Agreement with PFG on February 27, 2009, which was established on July 23, 2008. See section below titled “Credit Facilities” for the terms of the original and amended agreement with PFG. The outstanding balance on the line of credit with PFG was $0.8 million as of June 30, 2009.




During the quarter ended June 30, 2009, we continued to invest in product development. Our efforts have been directed toward new feature enhancements in parallel with the continual improvement of our secure content management appliances and system protection products. Our development efforts were primarily focused
on delivering additional security features for our product lines while employing a cost-reduction strategy.




Critical Accounting Policies and Estimates




There are several accounting policies that involve management’s judgments and estimates and are critical to understanding our historical and future performance as these policies and estimates affect the reported amounts of revenue and other significant areas in our reported financial statements.




●
revenue recognition;●
allowance for doubtful accounts;●
impairment of goodwill and long-lived assets;●
accounting for income taxes;●
warranty obligation; and●
accounting for stock options.




13




Please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” located within our 10-K filed on March 11, 2009 for the year ended December 31, 2008 for further discussion of our  “Summary of Significant Accounting Policies and Estimates”.
There have been no material changes to these accounting policies during the three months ended June 30, 2009.




Results of Operations




Comparisons of the Three Months Ended June 30, 2009 and 2008 (in thousands, except percentages)





Revenues


For theThree Months EndedJune 30,2009


2008


% ChangeTotal revenues

$
4,754


$
4,600



3.3%


Revenues increased $154,000 for the three months ended June 30, 2009, compared to the same period in 2008 as a result of an increase of $265,000 in subscription revenues, offset by a decrease of $99,000 in appliance revenues.


Subscription Revenues
 For theThree Months EndedJune 30,2009


2008


% ChangeSubscription revenues

$
3,692


$
3,427



7.7%As a percentage of total revenues


77.7%



74.5%


For the second quarter of 2009, our subscription revenues increased approximately $265,000 compared to the second quarter of 2008 due to increases in our customer base. The subscription renewal rates for our products traditionally range from 75% to 95%.


Appliance Revenues
 For theThree Months EndedJune 30,2009


2008


% ChangeAppliance revenues

$
1,062


$
1,161



(8.5)%As a percentage of total revenues


22.3%



25.2%


For the three months ended June 30, 2009, appliance revenues decreased approximately $99,000 compared with the respective period in 2008. Total units shipped for the three months ended June 30, 2009 were 638 compared with 661 for the same period in 2008.




Cost of Revenues For theThree Months EndedJune 30,2009


2008


% ChangeTotal cost of revenues

$
1,245


$
1,372



(9.3)%Gross margin percentage


73.8%



70.2%




14




Cost of revenues consist primarily of the cost of contract manufactured hardware, royalties paid to third parties under technology licensing agreements, packaging costs, fee-based technical support costs and freight. Cost of revenues decreased $127,000 for the three months ended June 30, 2009 compared to the same
period in 2008. See the discussion of changes in the cost of subscription and appliance revenues below.




Cost of Subscription Revenues For theThree Months EndedJune 30,2009


2008


% ChangeCost of subscription revenues

$
549


$
557



(1.4)%Gross margin percentage


85.1%



83.7%
 
 The cost of subscription revenues includes the technical operations group that maintains the various databases and the technical support group.
  Cost of Appliance Revenues


For theThree Months EndedJune 30,2009


2008


% ChangeCost of appliance revenues

$
696


$
811



(14.2)%Gross margin percentage


34.4%



30.1%


The cost of appliance revenues, which includes contract manufactured equipment, packaging and freight, decreased $115,000 for the three months ended June 30, 2009 compared to the same period in 2008. Gross margin increased for the period mentioned above as a result of the higher selling price of our h-series appliances and a noticeable shift as a result
of our marketing and sales efforts in customer demand toward the higher-end models during the three months ended June 30, 2009.




Sales and Marketing Expense


For theThree Months EndedJune 30,2009


2008


% ChangeSales and marketing expense

$
1,581


$
2,065



(23.4)%As a percentage of total revenues


33.3%



44.9%


Sales and marketing expense consists primarily of salaries, related benefits, commissions, consultant fees, advertising, lead generation and other costs associated with our sales and marketing efforts. For the three months ended June 30, 2009, sales and marketing expense decreased 23.4%, or $484,000, over the same
period in 2008 mainly attributable to our successful cost reduction efforts.


15
 
  Research and Development Expense


For theThree Months EndedJune 30,2009


2008


% ChangeResearch and development expense

$
870


$
746



16.6%As a percentage of total revenues


18.3%



16.2%


Research and development expense consists primarily of salaries, related benefits, third-party consultant fees and other engineering related costs. The increase of $124,000 for the second quarter of 2009 compared to the same period in 2008 was primarily the result of a net increase in consultant fees, offset by
a decrease in compensation costs.  Management believes that a significant investment in research and development is required to remain competitive and we expect to continue to invest in research and development activities.




We anticipate research and development expenses to increase in 2009 compared to 2008, as we extend the core functionality and features within our products.




General and Administrative Expense


For theThree Months EndedJune 30,2009


2008


% ChangeGeneral and administrative expense

$
1,053


$
1,377



(23.5)%As a percentage of total revenues


22.1%



29.9%


General and administrative expenses, which consist primarily of salaries and related benefits, and fees for professional services, such as legal and accounting services, decreased $324,000 for the quarter ended June 30, 2009, compared to the same period in 2008, mainly due to our extensive cost cutting efforts.
The most significant decreases during the second quarter of 2009 included decreases in compensation and consulting expenses of $0.2 million and a decrease in lease and rent expenses of $0.1 million.


Interest and Other Income, Net
 For theThree Months EndedJune 30,2009


2008


% ChangeInterest and other income, net

$
57


$
(23)



(347.8)%As a percentage of total revenues


1.2%



(0.5)%





Interest and other income, net, includes interest expense, interest income, and other income. The increase for the three months ended June 30, 2009 over the same period in 2008 was the result of a decrease in interest expense related to short-term borrowings and a decrease in settlement of trade payables.




Comparisons of the Six Months Ended June 30, 2009 and 2008 (in thousands, except percentages)


Revenues
 For theSix Months EndedJune 30,2009


2008


% ChangeTotal revenues

$
9,203


$
8,509



8.2%
 
 16
  Revenues increased $694,000 for the six months ended June 30, 2009, compared to the same period in 2008 as a result of increases of $650,000 in subscription revenues and $54,000 in appliance revenues.


Subscription Revenues
 For theSix Months EndedJune 30,2009


2008


% ChangeSubscription revenues

$
7,381


$
6,731



9.7%As a percentage of total revenues


80.2%



79.1%


For the six months ended June 30, 2009, our subscription revenues increased approximately $650,000 compared to the first quarter of 2008 due to increases to our customer base. The subscription renewal rates for our products traditionally range from 75% to 95%.


Appliance Revenues
 For theSix Months EndedJune 30,2009


2008


% ChangeAppliance revenues

$
1,816


$
1,762



3.1%As a percentage of total revenues


19.7%



20.7%


For the six months ended June 30, 2009, appliance revenues increased approximately $54,000 compared with the respective period in 2008. Total units shipped for the six months ended June 30, 2008 were 1,242 compared with 1,190 for the same period in 2008. The increase in revenue can also be attributed to the higher
selling price of our h-series appliances and a noticeable shift in customer demand toward the higher-end models during 2009.  We expect appliance revenue to continue to increase in future periods due to the increased efforts of our sales team to upsell our customers these appliances, which are designed to enhance the iPrism web filtering capabilities.


Cost of Revenues
 For theSix Months EndedJune 30,2009


2008


% ChangeTotal cost of revenues

$
2,357


$
2,354



0.1%Gross margin percentage


74.4%



72.3%





Cost of revenues consists primarily of the cost of contract manufactured hardware, royalties paid to third parties under technology licensing agreements, packaging costs, fee-based technical support costs and freight. Cost of revenues increased $3,000 for the six months ended June 30, 2009 compared to the same period
in 2008. See the discussion of changes in the cost of subscription and appliance revenues below.


Cost of Subscription Revenues
 For theSix Months EndedJune 30,2009


2008


% ChangeCost of subscription revenues

$
1,123


$
1,113



0.9%Gross margin percentage


84.8%



83.5%
 
 17


The cost of subscription revenues includes the technical operations group that maintains the various databases and the technical support group.


Cost of Appliance Revenues
 For theSix Months EndedJune 30,2009


2008


% ChangeCost of appliance revenues

$
1,232


$
1,236



(0.3)%Gross margin percentage


32.2%



29.9%
 
 The cost of appliance revenues, which includes contract manufactured equipment, packaging and freight, decreased $4,000 for the six months ended June 30, 2009 compared to the same period in 2008. Gross margin increased for the period mentioned above as a result of the higher selling price of our h-series appliances
and a noticeable shift as a result of our marketing and sales efforts in customer demand toward the higher-end models during the six months ended June 30, 2009.


Sales and Marketing Expense
 For theSix Months EndedJune 30,2009


2008


% ChangeSales and marketing expense

$
3,241


$
3,881



(16.5)%As a percentage of total revenues


35.2%



45.6%


Sales and marketing expense consists primarily of salaries, related benefits, commissions, consultant fees, advertising, lead generation and other costs associated with our sales and marketing efforts. For the six months ended June 30, 2009, sales and marketing expense decreased 16.5%, or $640,000, over the same
period in 2008 mainly attributable to our successful cost reduction efforts.


Research and Development Expense
 For theSix Months EndedJune 30,2009


2008


% ChangeResearch and development expense

$
1,905


$
1,499



27.1%As a percentage of total revenues


20.7%



17.6%
 
 Research and development expense consists primarily of salaries, related benefits, third-party consultant fees and other engineering related costs. The increase of $406,000 for the six months ended June 30, 2009 compared to the same period in 2008 was primarily the result of a net increase in consultant fees offset
by a decrease in compensation costs.  Management believes that a significant investment in research and development is required to remain competitive and we expect to continue to invest in research and development activities.
  18
  We anticipate research and development expenses to increase in 2009 compared to 2008, as we extend the core functionality and features within our products.


General and Administrative Expense
 For theSix Months EndedJune 30,2009


2008


% ChangeGeneral and administrative expense

$
2,247


$
2,575



(12.7)%As a percentage of total revenues


24.4%



30.3%





General and administrative expenses, which consist primarily of salaries and related benefits, and fees for professional services, such as legal and accounting services, decreased $0.3 million for the six months ended June 30, 2009, compared to the same period in 2008, mainly due to our extensive cost cutting efforts.
The most significant decreases during the six months ended June 30, 2009 included decreases in compensation and consulting expenses of $0.4 million and  lease and rent expenses of $0.2 million, offset by an increase of 0.3 million in FAS123R expenses.


Interest and Other Income, Net
 For theSix Months EndedJune 30,2009


2008


% ChangeInterest and other income, net

$
133


$
(144)



(192.4)%As a percentage of total revenues


1.4%



(1.7)%
 
 Interest and other income, net, includes interest expense, interest income, and other income. The increase for the six months ended June 30, 2009 over the same period in 2008 was the result of an increase in interest expense related to short-term borrowings and a gain on the change in fair value of the warrant derivative liability offset by a decrease
in settlement of trade payables.


Gain on Sale of Assets
 For theSix Months EndedJune 30,2009


2008


% ChangeGain on sale of assets

$
0


$
320



(100.0)%As a percentage of total revenues


0.0%



3.8%





The gain for the six months ended June 30, 2008 consisted of a gain from the excess renewal fees collected by Shavlik and from the release of the first half of funds from an indemnification from EVault.





Recent Accounting Pronouncements




In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”). Through SFAS No. 168, the FASB confirmed that the Codification
will become the single official source of authoritative US GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, EITF, and related literature. After the effective date of the Codification, only one level of authoritative US GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change US GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online
research system. The Codification becomes effective for interim and annual periods ending on or after September 15, 2009. The Company will apply the Codification beginning in the quarter ending September 30, 2009. The adoption of the Codification will not have an effect on the Company’s financial statements, but will impact the Company’s future financial statement disclosures since all future references to authoritative accounting literature will be referenced in accordance with the Codification.




19




In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”).  This statement establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but
before financial statements are issued or are available to be issued.  This statement requires an entity to apply the requirements to interim or annual financial periods ending after June 15, 2009. The Company has adopted the provisions of SFAS 165 for the quarter ended June 30, 2009.  The adoption of these provisions did not have a material impact on its financial position, cash flows, or results of operations.




In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”),
which provides additional guidance for estimating fair value in accordance with SFAS 157.  The Company adopted the provisions of FSP FAS 157-4 for the quarter ended June 30, 2009.  The adoption of FSP FAS 157-4 did not have a material impact on its consolidated financial position, cash flows, or results of operations.




In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”), which provides new guidance on the recognition of other-than-temporary impairments
of investments in debt securities and provides new presentation and disclosure requirements for other-than-temporary impairments of investments in debt and equity securities.  FSP FAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009; early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of FSP FAS 115-2 for the quarter ended June 30, 2009. The adoption of FSP FAS 115-2 did not have a material impact on its consolidated
financial position, cash flows, or results of operations.




In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,“Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”).  FSP FAS 107-1 amends SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments” to require disclosures about fair value of financial instruments in interim reporting periods.  Such disclosures were previously required only in annual financial statements.  FSP FAS 107-1 is effective for interim reporting periods ending after June 15, 2009; early adoption permitted for periods ending after March 15, 2009.  The Company adopted the provisions of FSP FAS 107-1 for the quarter ended June 30, 2009.  The
adoption of FSP FAS 107-1 did not have a material impact on its consolidated financial position, cash flows, or results of operations.




In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock” (“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Paragraph 11(a) of SFAS No. 133 - specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company's own stock and (b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature
is indexed to an issuer's own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. The Company’s adoption of EITF 07-5 effective January 1, 2009, resulted in the identification of 463,500 warrants that were determined to be ineligible for equity classification because of certain provisions that may result in an adjustment to their exercise price, and accordingly, the estimated fair value of the warrants as of January 1, 2009 was reclassified to a liability and a cumulative
effect adjustment was recorded based on the difference between amounts recognized in the consolidated balance sheet before and after the initial adoption of EITF 07-5.  In addition, the change in the estimated fair value of the warrants was recognized in the statement of operations for the three and six months ended June 30, 2009 (See Note 5).




In September 2006, FASB issuedSFAS No. 157, “Fair Value Measurements”(“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value
in U.S. GAAP, and expands disclosures about fair value measurements. This statement applies in those instances where other accounting pronouncements require or permit fair value measurements and the Board has previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change the current practice. In February 2008,
the FASB issued FSP FAS 157-2 which defers the effective date of SFAS 157 for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequent recurring basis, until years beginning after November 15, 2008.  The Company’s adoption of SFAS 157 for its financial assets and liabilities on January 1, 2008 and FSP FAS 157-2 during the first quarter of 2009 for its non-financial assets and liabilities did not have a material impact on the
Company’s consolidated financial position, cash flows, or results of operations.




20




Liquidity and Capital Resources




Cash Flows




Our largest source of operating cash flows is cash receipts from our customers from purchases of products, subscription, maintenance and technical support.  Our standard payment terms for both subscription and support invoices are net 30 days from the date of invoice but from time to time we enter into
payment terms that are greater then 30 days.  The recurring subscription portion of our business provides predictable cash flow but new sales fluctuate due to seasonal buying behavior and sales and marketing effectiveness.  Our primary uses of cash for operating activities include cost associated with appliance sales and appliance warranty, costs to maintain our subscription services, personnel, facilities, sales and marketing, research and development, and general and administrative expenses.




Cash used in operations for the six months ended June 30, 2009 was $615,000 compared to $2.1 million for the same period in 2008.  This decrease was primarily due to lower operating losses and substantial improvements to the cost structure of our business.




For the six months ended June 30, 2009, cash used in investing activities was $76,000 for purchases of fixed assets.  Cash provided by investing activities for the respective period in 2008 totaled $316,000 and represented amounts received pursuant to previous sales of two product lines.




Cash flows used by financing activities for the two quarters of 2009 was $309,000, mainly the result of paying down the balance on our line of credit with SVB.  For the same period in 2008 financing activities provided cash of $828,000 primarily a result of drawing on our line of credit.  The
outstanding balance of short term borrowings was $2.2 million as of June 30, 2009 compared to $2.5 million as of June 30, 2008.




As a result of the foregoing, the net decrease in cash and cash equivalents was $1.0 million for the six months ended June 30, 2009 as compared to a net decrease of approximately $921,000 for the comparable period in 2008.




Credit Facilities




Silicon Valley Bank




On May 15, 2007, the Company entered into a Loan Agreement with SVB which provides for a credit facility not to exceed $2.0 million, subject to a borrowing base formula, as described below. The SVB Loan Agreement was amended on February 27, 2009 (the “Loan Amendment”). Pursuant to the terms of the Loan
Amendment, among other things, SVB (i) decreased the interest rate on the revolving line of credit to 3.50% (from 3%) over the greater of the prime rate or 7.5% (from 10.5%), (ii) modified the tangible net worth covenant to no less than negative seventeen million dollars ($17,000,000) at all times, increasing quarterly by fifty percent (50%) of net income and monthly by fifty percent (50%) of issuances of equity after January 31, 2009 and the principal amount of subordinated debt received after January
31, 2009, (iii) modified the borrowing base to seventy percent (70%) of eligible accounts and the lesser of sixty percent (60%) of advanced billing accounts or six hundred thousand dollars ($600,000) as determined by SVB; provided, however, that SVB may, with notice to the Company, decrease the foregoing percentage in its good faith business judgment based on events, conditions, contingencies, or risks which, as determined by SVB, may adversely affect collateral, and (iv) extended the revolving line maturity
date to May 15, 2010. At June 30, 2009, total availability under the SVB Loan Agreement was $2.0 million, of which $1.5 million was outstanding, and the applicable interest rate was 7.5%. The Company was in compliance with the above stated covenants and restrictions. The obligations under the SVB Loan Agreement are secured by substantially all of St. Bernard’s assets.




In connection with the execution of a previous SVB Loan Amendment dated January 25, 2008, St. Bernard issued warrants to SVB which allows SVB to purchase up to 140,350 shares of our common stock at an exercise price of $0.57 per share. The warrants expire on the seventh anniversary of their issue date. We recorded
deferred debt issuance costs in the amount of $58,000, based on the estimated fair value allocated to the warrants using the following assumptions; 75.35% volatility, risk free interest rate of 3.61%, an expected life of seven years and no dividends.  Amortization of the debt issuance costs, including amounts recorded as a debt discount for warrants previously issued for the three and six months ended June 30, 2009, which is being recorded as interest expense, was approximately $23,000 and $45,000,
respectively. Furthermore, St. Bernard agreed to grant SVB certain piggyback registration rights with respect to the shares of common stock underlying the warrants.




21




Partners for Growth II, LP




On July 21, 2008, the Company entered into a Loan Agreement with PFG (the “PFG Loan Agreement”), which became effective on July 23, 2008 and which provides for a credit facility not to exceed $1.5 million. The PFG Loan Agreement was subsequently amended on February 27, 2009.  The annual interest
rate on the PFG Loan is set at the Prime Rate, quoted by SVB as its Prime Rate from time to time, plus 3% (the “Applicable Rate”).  At June 30, 2009, the effective interest rate was 7%. The PFG Loan Agreement will terminate on July 20, 2010, on which date all principal, interest and other outstanding monetary obligations must be repaid to PFG. The obligations under the PFG Loan Agreement are secured by a security interest in collateral comprised of substantially all of St. Bernard’s
assets, subordinated to the SVB Loan Agreement.




The PFG Loan Agreement contains affirmative, negative and financial covenants customary for credit facilities of this type, including, among other things, limitations on indebtedness, liens, sales of assets, mergers, investments, and dividends.  The PFG Loan Agreement also requires that St. Bernard maintain
a Modified Net Income (as defined in the PFG Loan Agreement) greater than zero. PFG eliminated the Modified Net Income covenant for the reporting periods ending February 28, 2009 and March 31, 2009. The PFG Loan Agreement contains events of default customary for credit facilities of this type (with customary grace or cure periods, as applicable) and provides that upon the occurrence and during the continuance of an event of default, among other things, the interest rate on all borrowings will be increased, the
payment of all borrowings may be accelerated, PFG’s commitments may be terminated and PFG shall be entitled to exercise all of its rights and remedies, including remedies against collateral.  At June 30, 2009, the Company was in compliance with the above stated covenants.




In connection with the execution of the PFG Loan Agreement, St. Bernard received approximately $1,000 from PFG, and as a result, issued a warrant to PFG on July 21, 2008 (the “Warrant”), which allows PFG to purchase up to 450,000 shares of St. Bernard common stock at an exercise price equal to $0.46
per share. The Warrant expires on July 20, 2013.  The Company recorded deferred debt issuance costs in the amount of $125,000, based on the estimated fair value allocated to the warrants using the following assumptions; 69.07% volatility, risk free interest rate of 4.09%, an expected life of five years and no dividends. Amortization of the debt issuance costs for the three and six months ended June 30, 2009, which is being recorded as interest expense, was approximately $16,000 and $31,000, respectively.
As of June 30, 2009, the balance on the PFG Loan Agreement was $750,000.




Losses from Operations – Liquidity




As of June 30, 2009, the Company had approximately $1.1 million in cash and cash equivalents and a working capital deficit of $10.6 million.  Approximately $10.1 million of our current liability balance at June 30, 2009 consisted of deferred revenues, which represents amounts that are expected to be amortized
into revenue as they are earned in future periods. The Company also had a stockholders’ deficit of approximately $9.1 million at June 30, 2009.




The Company has a history of losses and has not yet been able to achieve profitability. For the three and six months ended June 30, 2009, the Company incurred net losses of $54,000 and $685,000, respectively, and through June 30, 2009 and 2008 has recorded a cumulative net loss of $50.1 million and 49.5 million,
respectively. Losses from operations decreased from $960,000 in the first quarter of 2008 to an income of $4,000 in the respective period in 2009. In an effort to achieve profitability, the Company has made and continues to make substantial changes to the cost structure of its business. These changes include the closure of its sales and marketing offices in Europe and Australia, reducing headcount to be in line with the current size of its business, renegotiating vendor contracts, and refocusing its marketing
strategy around its core business. During February 2009, the Company also extended to May 15, 2010 the maturity date of the Loan and Security Agreement (the “SVB Loan Agreement”) with Silicon Valley Bank. (“SVB”) and also negotiated a significant reduction in the interest rate.




The Company believes that its existing cash resources, combined with projected collections on billings, reduced expenditures based on implemented cost reductions, and borrowing availability under existing credit facilities, will provide sufficient liquidity for the Company to meet its continuing obligations for
the next twelve months. However, there can be no assurances that projected revenue will be achieved or the improvement in operating results will occur. In the event cash flow from operations is not sufficient, the Company may require additional sources of financing in order to maintain its current operations. These additional sources of financing may include public or private offerings of equity or debt securities. Whereas management believes it will have access to these financing sources, no assurance can be
given that additional sources of financing will be available on acceptable terms, on a timely basis, or at all.




Off-Balance Sheet Arrangements
  Except for the commitments arising from our operating lease arrangements, we have no other off-balance sheet arrangements that are reasonably likely to have a material effect on our financial statements.


22




Forward-Looking Statements





This Quarterly Report on Form 10-Q and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts
and factors currently known by us. Consequently, these forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements. For a summary of such risks and uncertainties, please see Risk Factors located in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 11, 2009.
  Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,” “may,” “will,” “plan,” “intends,” “estimates,” “could,” “should,” “would,”
“continue,” “seeks,” “pro forma,” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, technology enhancements, possible changes in legislation and other statements that are not historical.
  The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we
assume no obligation to update our forward-looking statements, even if new information becomes available in the future.




Item 3. Quantitative and Qualitative Disclosures About Market Risk




As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.




Item 4T. Controls and Procedures




Evaluation of Disclosure Controls




We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions.




Based on his evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q and subject to the foregoing, our Chief Executive Officer has concluded that our disclosure controls and procedures were effective.




Changes in Internal Control over Financial Reporting




During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.







23




PART II – OTHER INFORMATION




Item 1. Legal Proceedings




In the normal course of business, the Company is occasionally named as a defendant in various lawsuits.  On March 14, 2007, a stockholder filed an action against the Company seeking money damages in the San Diego Superior Court for the County of San Diego, asserting claims of intentional misrepresentation,
negligent misrepresentation, fraudulent concealment, and negligence. The Company has successfully appealed the Superior Court's denial of its motion to compel arbitration.  Effective March 31, 2009, the Company and the stockholder entered into a Settlement Agreement, pursuant to which the parties released and forever discharged each other from any and all claims and causes of action, in connection with the Claim.  There was no cash outlay by the Company as part of the settlement and the settlement was
not material to the Company’s financial condition or operating results.




On July 9, 2009, an action was filed in the United States District Court for the Southern District of California by Southwest Technology Innovations LLC (the “Plaintiff”) against the Company and Espion International, Inc., Workgroup Solutions, Inc., SonicWall, Inc., Mirapoint Software, Inc., and Proofpoint,
Inc., (collectively the “Defendants”).  In this matter, the Plaintiff is claiming patent infringement arising under the patent laws of the United States. The patent-in-suit is U.S. Patent No. 6,952,719 entitled “Spam Detector Defeating System” which was issued on October 4, 2005. The Plaintiff is seeking a judgment in favor of Plaintiff and is seeking an award of unspecified damages. The Company intends to vigorously defend its interests in this matter.




Item 1A. Risk Factors




As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.




Item 2. Unregistered Sales of Equity Securities and Use of Proceeds




None.




Item 3. Defaults Upon Senior Securities




None.




Item 4. Submission of Matters to a Vote of Security Holders




The Annual Meeting of Stockholders was held on Monday, June 15, 2009.  The following matters were voted upon at the meeting and were adopted by the margins indicated:




1.  The stockholders elected four Directors to hold office until the 2010 Annual Meeting of Stockholders or until his or her successor is elected and qualified.




Number of SharesName of Director Elected

For


Against


Abstained/WithheldHumphrey Polanen


7,345,443



—



1,579,036Scott Broomfield


7,346,335



—



1,578,144Bart A.M. van Hedel


7,346,335



—



1,578,144Louis Ryan


7,409,000



—



1,515,479




2.  The stockholders ratified the selection by the Audit Committee of the Board of Squar, Milner, Miranda & Williamson, LLP as independent auditors of the Company for its fiscal year ending December 31, 2009.




For

8,908,538Against

9,816Abstain

6,125




On June 23, 2009, the management of the Company, received a resignation letter, dated June 23, 2009  from Scott Broomfield, a member of the Board, indicating that he was resigning from the Board effective immediately due to fundamental and irreconcilable differences.  At the time of his resignation,
Mr. Broomfield served on the Company’s Nominating and Corporate Governance and Compensation Committees and was chairman of the Audit Committee.




24




Item 5.  Other Information




None.





Item 6.  Exhibits





3.1
Amended and Restated Certificate of Incorporation of St. Bernard Software, Inc. (formerly known as Sand Hill IT Security Acquisition Corp.) (incorporated herein by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 initially filed with the Securities and Exchange Commission on December 16, 2005).3.2
Amended and Restated Bylaws of St. Bernard Software, Inc. (formerly known as Sand Hill IT Security Acquisition Corp.) (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K initially filed with the Securities and Exchange Commission on April 5, 2007).4.1
Specimen Unit Certificate of St. Bernard Software, Inc. (formerly known as Sand Hill IT Security Acquisition Corp.) (incorporated herein by reference to Exhibit 4.1 to the Company’s Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-114861) filed with the Securities and Exchange Commission on June 23,
2004).4.2
Specimen Common Stock Certificate of St. Bernard Software, Inc. (formerly known as Sand Hill IT Security Acquisition Corp.) (incorporated herein by reference to Exhibit 4.2 to the Company’s Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-114861) filed with the Securities and Exchange Commission on
June 23, 2004).4.3
Specimen Warrant Certificate of St. Bernard Software, Inc. (formerly known as Sand Hill IT Security Acquisition Corp.) (incorporated herein by reference to Exhibit 4.3 to the Company’s Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-114861) filed with the Securities and Exchange Commission on June 23,
2004).4.4
Unit Purchase Option No. UPO-2 dated July 30, 2004, granted to Newbridge Securities Corporation (incorporated herein by reference to Exhibit 4.4.1 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005).4.5
Unit Purchase Option No. UPO-3 dated July 30, 2004, granted to James E. Hosch (incorporated herein by reference to Exhibit 4.4.2 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005).4.6
Unit Purchase Option No. UPO-4 dated July 30, 2004, granted to Maxim Group, LLC (incorporated herein by reference to Exhibit 4.4.3 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005).4.7
Unit Purchase Option No. UPO-5 dated July 30, 2004, granted to Broadband Capital Management, LLC (incorporated herein by reference to Exhibit 4.4.4 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005).4.8
Unit Purchase Option No. UPO-6 dated July 30, 2004, granted to I-Bankers Securities Incorporated (incorporated herein by reference to Exhibit 4.4.5 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005).4.9
Warrant issued by St. Bernard Software, Inc. on May 16, 2007 to Silicon Valley Bank (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2007).4.10
Warrant issued by St. Bernard Software, Inc. on January 25, 2008 to Agility Capital, LLC (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2008).




25




4.11
Warrant issued by St. Bernard Software, Inc. on January 25, 2008 to Silicon Valley Bank (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2008).4.12
Warrant issued by St. Bernard Software, Inc. on July 21, 2008 to Partners for Growth II, L.P. (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2008).4.13
Warrant Purchase Agreement between St. Bernard Software, Inc. and Partners for Growth II, L.P. dated July 21, 2008 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2008).4.14
Warrant Purchase Agreement among Humphrey P. Polanen and Newbridge Securities Corporation and I-Bankers Securities Incorporated (incorporated herein by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (File No. 333-114861) filed with the Securities and Exchange Commission on April 26, 2004.)4.15*
St. Bernard Software, Inc. Amended and Restated 2005 Stock Option Plan (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2008).4.16*
AgaveOne, Inc. (dba Singlefin) 2005 Stock Incentive Plan (incorporated herein by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on December 28, 2006).4.17*
St. Bernard Software, Inc. 2006 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 22, 2006).10.1
Loan and Security Agreement between St. Bernard Software, Inc. and Silicon Valley Bank dated May 11, 2007 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2007).10.2
Third Amendment to Loan and Security Agreement between St. Bernard Software, Inc. and Silicon Valley Bank dated January 25, 2008 (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2008).10.3
Loan Agreement between St. Bernard Software, Inc. and Agility Capital, LLC dated January 25, 2008 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2008).10.4
Intellectual Property Security Agreement between St. Bernard Software, Inc. and Agility Capital, LLC dated January 25, 2008 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2008).10.5
Subordination Agreement between Agility Capital, LLC and Silicon Valley Bank dated January 25, 2008 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2008).10.6
Intellectual Property Security Agreement between St. Bernard Software, Inc. and Silicon Valley Bank dated January 25, 2008 (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2008).




26




10.7*
St. Bernard Software, Inc. 2008 Variable (Bonus) Compensation Plan (incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2008).10.8*
Employment Agreement between St. Bernard Software, Inc. and Louis E. Ryan executed February 10, 2009 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 11, 2009).10.9
Fifth Amendment to Loan and Security Agreement between St. Bernard Software, Inc. and Silicon Valley Bank dated February 27, 2009 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2009).10.10
First Amendment to Loan Agreement between St. Bernard Software, Inc. and Partners for Growth II, L.P. dated February 27, 2009 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2009).10.11*
Amendment to the pricing of stock options grants under the 2005 Stock Option Plan (incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 11, 2009).10.12*
Amended Employment Agreement between St. Bernard Software, Inc. and Steve Yin executed April 2, 2009 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2009).10.13*
Consulting Agreement between St. Bernard Software, Inc. and Softworks Group Pty Ltd executed January 7, 2009 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 15, 2009).10.14*
Employment agreement between St. Bernard Software, Inc. and Thalia Gietzen executed June 15, 2009 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2009).14.1
Amended Code of Business Conduct and Ethics adopted April 1, 2009 (incorporated herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2008).17.1
Resignation letter to the management of St. Bernard Software, Inc. and Scott Broomfield executed June 23, 2009 (incorporated herein by reference to Exhibit 17.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 30, 2009).31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


___________________


*
Management contract or compensatory plan or arrangement





27





SIGNATURES





In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





ST. BERNARD SOFTWARE, INC.Dated: August 14, 2009
By:
/s/ Louis E. RyanLouis E. Ryan
Chief Executive Officer and
Chairman of the Board of Directors










































28