UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from _________________ to __________________
Commission file number 0-49763
CIROND CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0469593
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4185 STILL CREEK DRIVE #B-101, BURNABY, BRITISH COLUMBIA, CANADA V5C 6G9
(Address of principal executive offices)
(604) 205-5039
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
37,110,000 SHARES OF COMMON STOCK, $0.001 PAR VALUE, AS OF MARCH 31, 2005
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
Consolidated Interim Financial Statements of
CIROND CORPORATION
(Expressed in United States dollars)
Three months ended March 31, 2005
2
CIROND CORPORATION
Consolidated Interim Balance Sheets
(Expressed in United States dollars)
March 31, 2005 and December 31 2004
====================================================================================================================
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash $ 687,217 $ 1,308,086
Amounts receivable, net of allowance of $nil (2004 - $nil) 23,948 14,883
Prepaid expenses and deposits 13,268 17,873
---------------------------------------------------------------------------------------------------------------
724,433 1,340,842
Property and equipment 63,919 57,875
Website development 5,549 6,342
- --------------------------------------------------------------------------------------------------------------------
$ 793,901 $ 1,405,059
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities $ 109,621 $ 188,698
Consulting fees payable (note 3) 96,366 134,611
Deferred revenue - 5,874
Dividends payable 24,658 2,466
Share subscriptions payable (note 4) 400,000 400,000
Due to stockholder (note 5) 111,389 111,575
---------------------------------------------------------------------------------------------------------------
742,034 843,224
Redeemable, convertible preferred stock with a par value of
$0.001. 25,000,000 authorized, 2,000 issued (December 31,
2004 - 2,000), net of deferred financing costs (note 6) 83,400 70,500
Stockholders' equity (deficiency):
Capital stock:
100,000,000 voting common shares, with $0.001 par value
authorized, 37,110,000 issued (December 31,
2003 - 34,460,000) 37,110 37,110
Additional paid-in capital 3,643,659 3,595,739
Deficit (3,712,302) (3,141,514)
---------------------------------------------------------------------------------------------------------------
(31,533) 491,335
Going concern (note 2(a))
Commitments (note 8)
- --------------------------------------------------------------------------------------------------------------------
$ 793,901 $ 1,405,059
====================================================================================================================
See accompanying notes to consolidated interim financial statements.
3
CIROND CORPORATION
Consolidated Interim Statements of Loss
(Expressed in United States dollars)
Three months ended March 31, 2005 and 2004
(Unaudited)
====================================================================================================================
2005 2004
- --------------------------------------------------------------------------------------------------------------------
Revenue:
Software license fees (note 9) $ 35,882 $ 754,575
Expenses:
Advertising and promotion 70,170 39,737
Amortization 6,204 4,033
Consulting fees (note 3) 198,639 78,899
Foreign currency exchange loss (gain) (735) 1,785
Gain on recovery of account payable (50,000) -
Interest 418 317
Office and administrative 18,414 21,193
Professional fees 59,034 33,660
Research and development 123,355 161,737
Salaries and benefits 110,579 54,643
Travel 36,396 59,067
---------------------------------------------------------------------------------------------------------------
572,474 455,871
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income (536,592) 298,704
Interest income 3,362 745
- --------------------------------------------------------------------------------------------------------------------
Loss $ (533,230) $ 299,449
====================================================================================================================
Weighted average number of common shares outstanding,
basic and diluted 37,110,000 34,460,000
Loss per common share, basic and diluted $ (0.01) $ (0.01)
====================================================================================================================
See accompanying notes to consolidated interim financial statements.
4
CIROND CORPORATION
Consolidated Interim Statement of Stockholders' Equity (Deficiency)
and Comprehensive Loss
(Expressed in United States dollars)
From December 31, 2004 to March 31, 2005
(Unaudited)
===================================================================================================================================
Total
Additional stockholders'
Common Stock paid-in equity
Shares Amount capital Deficit (deficiency)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 37,110,000 $ 37,110 $ 3,595,739 $(3,141,514) $ 491,335
Common shares released from escrow in
consideration of consulting services (note 7) - - 47,920 - 47,920
Accretion of discount on redeemable, convertible
preferred stock (note 6) - - - (12,100) (12,100)
Amortization on deferred financing costs (note 6) - - - (800) (800)
Dividend on redeemable, convertible preferred stock - - - (24,658) (24,658)
Comprehensive loss:
Loss - - - (533,230) (533,230)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2005 37,110,000 $ 37,110 $ 3,643,659 $(3,712,302) $ (31,533)
===================================================================================================================================
See accompanying notes to consolidated interim financial statements.
5
CIROND CORPORATION
Consolidated Interim Statements of Cash Flows
(Expressed in United States dollars)
Three months ended March 31, 2005 and 2004
(Unaudited)
===============================================================================================================
2005 2004
- ---------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Income (loss) $ (533,230) $ 299,449
Item not involving cash:
Amortization 6,204 4,033
Common shares released from escrow in consideration
of consulting services 47,920 -
Changes in non-cash working capital:
Amounts receivable (9,065) 3,433
Prepaid expenses and deposits 4,605 145
Accounts payable and accrued liabilities (79,077) (81,844)
Consulting fees payable (38,245) -
Deferred revenue (5,874) 73,990
----------------------------------------------------------------------------------------------------------
(606,762) 299,206
Financing:
Share subscriptions proceeds - 2,000,000
Loan payable - (75,000)
Advances from (to) stockholder (186) -
Dividends paid (2,466) -
----------------------------------------------------------------------------------------------------------
(2,652) 1,925,000
Investing:
Expenditures on property and equipment (11,455) (18,069)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (620,869) 2,206,137
Cash, beginning of period 1,308,086 86,066
- ---------------------------------------------------------------------------------------------------------------
Cash, end of period $ 687,217 $ 2,292,203
===============================================================================================================
Supplementary information:
Interest paid $ 418 $ 317
Income taxes paid $ - $ -
===============================================================================================================
See accompanying notes to consolidated interim financial statements.
6
CIROND CORPORATION
Notes to Consolidated Interim Financial Statements
(Expressed in United States dollars)
Three months ended March 31, 2005
(Unaudited)
================================================================================
1. OPERATIONS:
Cirond Corporation ("Cirond" or the "Company") is incorporated under the
laws of the State of Nevada. The Company develops software solutions and
provides network security products and consulting services to governments
and private sector businesses to combat the threat to wired networks
represented by the deployment of unauthorized wireless networks. The
Company's solutions can also be used to implement, secure and manage
wireless networks.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Going concern
These interim financial statements have been prepared on the going
concern basis, which assumes the realization of assets and liquidation
of liabilities and commitments in the normal course of business for the
foreseeable future. The Company has realized a loss of $533,230 and
incurred negative cash flow from operations of $606,762 to March 31,
2005 and has an accumulated deficit of $3,712,302 as at March 31, 2005.
These factors raise substantial doubt as to the Company's ability to
continue as a going concern.
The application of the going concern concept is dependent upon the
Company's ability to receive continued financial support from its
creditors, stockholders and external investors and attaining profitable
operations through the sale of its software. These consolidated interim
financial statements do not give effect to any adjustment should the
Company be unable to continue as a going concern and, therefore, be
required to realize its assets and discharge its liabilities in other
than the normal course of business and at amounts differing from those
reflected in the consolidated financial statements. Management plans to
obtain equity and debt financing from external investors and to
actively market its wireless technology applications.
Management believes the plans described above will be sufficient to
meet the Company's liabilities and commitments as they become payable
over the next twelve months. There can be no assurance that
management's plans will be successful. Failure to obtain the support of
additional external investors to finance the development and marketing
of the Company's wireless technology applications will cause the
Company to curtail operations and impair the Company's ability to
continue as a going concern.
7
CIROND CORPORATION
Notes to Consolidated Interim Financial Statements
(Expressed in United States dollars)
Three months ended March 31, 2005
(Unaudited)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
b) Basis of presentation
The information included in the accompanying consolidated interim
financial statements is unaudited and should be read in conjunction
with the annual audited consolidated financial statements and notes
thereto contained in the Company's Report on Form 10-KSB for the fiscal
year ended December 31, 2004. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for
fair presentation of the results of operations for the interim periods
presented have been reflected herein. The results of operations for the
interim periods presented are not necessarily indicative of the results
to be expected for the entire fiscal year.
c) Recent accounting pronouncements
FASB issued a revision of SFAS No. 123 "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS No. 123(R)"). SFAS No. 123(R) requires a public
entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value
of the award. The compensation cost is to be recognized over the
service period which is determined by the vesting period. This
statement is effective as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. The adoption
of a revised SFAS 123 will impact the Company's operating expenses and
shareholders' equity (deficiency) to the extent that the Company issues
stock options in consideration for services in connection with its
proposed stock option plan.
3. RELATED PARTY TRANSACTIONS:
During the three month period ended March 31, 2005, the Company incurred
consulting fees from a company controlled by the President and Chief
Executive Officer totaling $45,000 (2004 - $45,000). At March 31, 2005,
$25,000 (2004 - $40,000) of these consulting fees were included in
consulting fees payable.
During the three month period ended March 31, 2005, the Company incurred
consulting fees from a Company controlled by the Chief Technology Officer
totaling $36,000 Cdn (2004 - $30,000 US). At March 31, 2005 $70,000 (2004 -
$80,000) of those consulting fees were included in accounts payable and
accrued liabilities consulting fees payable.
The amounts were incurred in the normal course of operations and are
recorded at the exchange amount, which is the amount established and agreed
to by the related parties.
8
CIROND CORPORATION
Notes to Consolidated Interim Financial Statements
(Expressed in United States dollars)
Three months ended March 31, 2005
(Unaudited)
================================================================================
4. SHARE SUBSCRIPTIONS PAYABLE:
In April 2004, the Company received a subscription for 4,000,000 common
shares and common share purchase warrants for aggregate cash proceeds of $2
million pursuant to an irrevocable subscription agreement. The subscriber
was granted common share purchase warrants as follows:
===========================================================================
Number of common shares Exercise price Expiry date
---------------------------------------------------------------------------
1,000,000 $ 0.50 April 19, 2005
1,000,000 $ 0.75 April 19, 2005
1,000,000 $ 1.00 April 19, 2006
1,000,000 $ 1.25 April 19, 2006
===========================================================================
In May 2004, the subscriber requested that his investment be rescinded and,
without waiving any of its rights it may have against the subscriber, the
Company returned $1.5 million, and subsequently repaid $100,000, of the
$2.0 million share subscription to the subscriber. As at March 31, 2005 and
subsequent to March 31, 2005, the Company offered to return the remaining
$400,000 to the subscriber upon execution of a mutual settlement agreement.
The subscriber has refused the offer. If such refusal continues, the
Company intends to issue common shares and common share purchase warrants
under the terms initially agreed to. The outcome of this matter, including
the settlement of the liability through the payment of cash or issuance of
common shares and common share purchase warrants and if additional costs
will be incurred on the settlement of the liability, cannot be determined
at this time.
5. DUE TO STOCKHOLDER:
The amount due to a stockholder is unsecured, non-interest bearing and has
no fixed terms of repayment.
6. REDEEMABLE, CONVERTIBLE PREFERRED STOCK:
On December 22, 2004 the Company entered into Securities Purchase
Agreements with several accredited investors pursuant to which the Company
agreed to sell, and the Investors agreed to purchase, 2,000 shares of
Series B 5% Convertible Preferred Stock, warrants to purchase 2,325,584
shares of common stock, and Additional Investment Rights for a total
consideration of $2,000,000. The warrants are exercisable for five years at
$0.55 per share. The Preferred Stock may be converted into shares of common
stock at a price of $0.43 per share at any time after issuance. The
Additional Investment Rights entitle the Purchasers to buy up to $4,000,000
of Preferred Stock and warrants on the same terms for period of six months
following the effective date of a Registration Statement on Form SB-2
related to common shares to be issued on conversion or redemption of the
preferred shares. In connection with the subscription, Cirond paid
Ascendiant Securities LLC ("Ascendiant") a cash commission of $160,000 and
a
9
CIROND CORPORATION
Notes to Consolidated Interim Financial Statements
(Expressed in United States dollars)
Three months ended March 31, 2005
(Unaudited)
================================================================================
6. REDEEMABLE, CONVERTIBLE PREFERRED STOCK (CONTINUED):
non-accountable expense allowance of $25,000, and issued Ascendiant
warrants for the purchase of up to 1,674,419 shares of common stock at
$0.55 per share. The warrants are exercisable for a five-year period
commencing from the date on which the right to exercise the warrants
vested.
The warrants are currently vested as to 372,093 shares. Further vesting
will occur as warrants and the Additional Investment Right securities are
exercised. The warrants contain piggyback registration rights and a net
exercise provision. In April 2005, the Company and the investors who
purchased the Additional Investment Rights determined to restructure the
Additional Investment Rights to some other form of equity security. The
Company expects to finalize the terms of the restructured security in May
2005.
The terms of the preferred stock provide that on the fifth anniversary of
the original issue date (December 22, 2009), the Company shall redeem all
of the then outstanding shares of preferred stock, for an amount in cash,
or if certain conditions are met during the 30 days prior to the redemption
date and at the election of the Company, in shares of common stock.
Accordingly, only unconverted preferred shares will be subject to this
redemption feature. As the redemption feature of the preferred shares is
contingent upon the holder not having converted the preferred shares into
common shares prior to the specified date, management has concluded that
the redeemable, convertible preferred shares are not required to be
classified as a liability under SFAS 150 but that this feature represents a
contingent redemption feature under paragraph 10 of the standard. However,
as all of the conditions, as defined in the Securities Purchase Agreement,
must be met for the Company to be able to redeem any outstanding shares for
other then cash, management has concluded that the preferred shares must be
classified outside of permanent shareholders' deficiency in accordance with
SEC Regulation S-X5-02(28).
The gross proceeds of $2,000,000 and net proceeds of $1,815,000 was
allocated between the redeemable preferred stock and common share purchase
warrants based on their relative fair values and a beneficial conversion
option was calculated to be recorded as a discount to redeemable,
convertible preferred stock and an increase in additional paid-in capital
at the issue date.
10
CIROND CORPORATION
Notes to Consolidated Interim Financial Statements
(Expressed in United States dollars)
Three months ended March 31, 2005
(Unaudited)
================================================================================
6. REDEEMABLE, CONVERTIBLE PREFERRED STOCK (CONTINUED):
The discount between the redemption amount and allocated proceeds is being
accreted to the redemption price on December 22, 2009 and deferred
financing costs are being amortized to December 22, 2009 by the interest
method with the accretion and amortization charged to deficit. The balances
at March 31, 2005 are as follows:
=============================================================================================================
Redeemable
Convertible Deferred
Preferred Financing
Stock Costs Total
-------------------------------------------------------------------------------------------------------------
Consideration $ 2,000,000 $ (185,000) $ 1,815,000
Assigned to warrants (627,000) 58,000 (569,000)
-------------------------------------------------------------------------------------------------------------
1,373,000 (127,000) 1,246,000
Beneficial conversion option (1,185,000) - (1,185,000)
-------------------------------------------------------------------------------------------------------------
188,000 (127,000) 61,000
Accretion and amortization to
December 31, 2004 8,900 600 9,500
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 196,900 (126,400) 70,500
Accretion and amortization to
March 31, 2005 12,100 800 12,900
-------------------------------------------------------------------------------------------------------------
Balance, March 31, 2005 $ 209,000 $ (125,600) $ 83,400
=============================================================================================================
11
CIROND CORPORATION
Notes to Consolidated Interim Financial Statements
(Expressed in United States dollars)
Three months ended March 31, 2005
(Unaudited)
================================================================================
7. COMMON SHARES ISSUED FOR CONSULTING SERVICES:
On August 2, 2004, Cirond entered into a Management Services Agreement with
Securities Trading Services Inc. ("STS"). The agreement was effective as of
August 2, 2004 and has a term of two years. Pursuant to the terms of the
agreement, Cirond must issue 1,200,000 shares of its common stock to STS in
consideration of services to be provided by STS. Common shares in the name
of STS will be held in escrow by Cirond, with Cirond releasing 50,000
shares from escrow for every month as services are performed. STS may not
vote any unearned shares held in escrow. In the event of a termination of
the agreement by Cirond for breach or cause, Cirond may repurchase and
cancel any unearned shares for $0.001 per share in an amount equal to
50,000 shares times the number of months remaining under the agreement
after termination. STS was granted piggy-back registration rights in
connection with the agreement and the shares are subject to anti-dilution
provisions in the event of a consolidation of Cirond's share capital. In
addition, upon closing of an equity financing of $1 million dollars, Cirond
shall pay a consulting fee in the amount of $5,000 to STS upon the first
day of each month over the remaining term of the contract. During the
period ended March 31, 2005, the monthly consulting was increased to an
agreed amount of $10,000 per month. The agreement also provides for the
accelerated release of shares from escrow, if STS secures financing for
Cirond, as follows:
o 100,000 shares upon STS securing an equity financing of $1 million.
o An additional 200,000 shares upon STS securing and additional $2
million of equity financing.
o An additional 450,000 shares upon STS securing an additional $5 million
of equity financing.
o An additional 450,000 shares upon STS securing an additional $5 million
of equity.
Common shares are valued as services are performed and common shares are
earned and eligible for release from escrow. For the three month period
ended March 31, 2005, $47,920 in compensation expense was recorded for the
period in consulting fees and 150,000 common shares were earned and
released from escrow. As at March 31, 2005, a total of 800,000 common
shares remain held in escrow in connection with this agreement. Unearned
shares that have not been released from escrow have not been included in
the calculation of the weighted average number of common shares, basic and
diluted.
12
CIROND CORPORATION
Notes to Consolidated Interim Financial Statements
(Expressed in United States dollars)
Three months ended March 31, 2005
(Unaudited)
================================================================================
8. STOCK OPTION COMMITMENTS:
As at March 31, 2005, in connection with a services agreement with an
unrelated party, the Company has committed to issue an option or warrant to
purchase up to 200,000 shares of common stock. The exercise price and
vesting provisions of the option or warrant are as follows:
o 50,000 shares exercisable at $0.45 per share, vesting on the 91st day
following execution of the agreement;
o 50,000 shares exercisable at $0.55 per share, vesting on the 181st day
following execution of the agreement;
o 50,000 shares exercisable at $0.65 per share, vesting on the 271st day
following execution of the agreement; and
o 50,000 shares exercisable at $0.75 per share, vesting on the 366th day
following execution of the agreement.
As at March 31, 2005, the Company's stock option plan is subject to final
approval by its shareholders. Accordingly, a grant date and measurement
date for the option or warrant above has not yet occurred and no
compensation cost related to the option or warrant commitment has been
recorded. Compensation cost related to the option or warrant will be
recorded in the period that the stock option plan is approved by the
Company's shareholders.
9. REVENUE:
The Company's revenue from its various product families is as follows:
===========================================================================
2005 2004
---------------------------------------------------------------------------
Winc products $ 20,588 $ 35,449
AirPatrol products 9,420 -
Source code license and support 5,874 719,126
---------------------------------------------------------------------------
$ 35,882 $ 754,575
===========================================================================
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
On November 25, 2003, pursuant to a Stock Exchange Agreement with
Seaside Holdings Inc. (f/k/a Cirond Technologies Inc.), a Colorado corporation
("CTI"), as amended by the First Amendment to the Stock Exchange Agreement dated
November 13, 2003 (the "First Amendment") (the Exchange Agreement and the First
Amendment are collectively referred to herein as the "Agreement"), we acquired
all of the issued and outstanding capital stock of CTI's wholly owned
subsidiary, Cirond Networks, Inc., a Nevada corporation ("CNI"), in exchange for
17,000,000 post-Forward Split shares of our common stock. As a result of this
share exchange, CTI owned approximately 51.2% (not taking into account the
issuance of 750,000 shares of our common stock in a private placement, the
certificates for which were issued subsequent to December 31, 2003, or 1,300,000
shares of common stock issued for the CNI Indebtedness described below) of our
issued and outstanding shares. In addition, pursuant to the terms of the
Agreement, we issued an aggregate of 1,300,000 post-Forward Split shares of our
common stock to fulfill CNI's debt obligations totaling $650,000 owed to Cirond
Venture Partners Inc., Stumdell Limited, and Steven Velardi. These three parties
loaned $650,000 to CNI and agreed to be paid in shares at the same price at
which shares were sold in the private placement.
As a result of the Agreement, effective November 25, 2003, CNI became
our wholly-owned subsidiary. We changed our name to Cirond Corporation as of
October 14, 2003.
For accounting purposes, the acquisition of CNI has been accounted for
as a recapitalization transaction. Under recapitalization accounting, CNI is
considered to have issued shares for consideration equal to our net monetary
assets with the results of our operations included in the consolidated financial
statements from the date of recapitalization on November 25, 2003. The
consolidated statements of loss, stockholders' deficiency and comprehensive loss
and cash flows reflect the results of operations and changes in financial
position of CNI, for the period from January 1, 2003 to December 31, 2003 and
January 1, 2004 to December 31, 2004, combined with those of the legal parent,
Cirond Corporation, from November 25, 2003, the date of the recapitalization, in
accordance with accounting principles generally accepted in the United States of
America.
As CNI is a software development company, it earns revenues through
license sales of its products, all of which utilize the proprietary technology
developed by CNI. Development of the technology requires a significant outlay of
cash before a viable product is developed that utilizes the technology. After
development of a product, even more cash is required to market the product
before any revenues are realized. Accordingly, the challenge that faces many
software development companies is being able to obtain enough cash to fund
research and development and marketing expenses and sustain the company until
revenues are generated. Such funds are needed fairly quickly after products are
developed, as the environment in which the products are used is constantly
changing. Companies face the risk of discovering that their products do not meet
the needs of the potential customers or are technologically outdated after a
marketing campaign is launched.
14
CNI entered into the above transaction with a publicly-held company to
improve its ability to obtain funding for research and development of its
products and marketing efforts. Management believed that it would be easier to
obtain funding if investors identified an "exit strategy" via the public
marketplace. By entering into the non-exclusive Source Code Licensing Agreement
with Computer Associates International, Inc. in January 2004, management
believed that CNI had achieved validation of its product by a well-recognized
firm in the computer industry.
While we will continue to improve our products, we believe that we have
now developed a viable suite of products dedicated to the goal of securing wired
networks against the threat of unauthorized wireless devices that is ready for
the marketplace. For the current fiscal year, management is focusing its efforts
and resources on marketing products through several channels. While we are
pursuing the licensing of our technology to other software development firms and
wireless network hardware manufacturers, such as the Computer Associates type of
arrangement, we are also trying to offer direct sales through our web site,
through value added resellers, and through marketing representatives.
GOING CONCERN
The accompanying consolidated interim financial statements have been
prepared in conformity with U.S. generally accepted accounting principles, which
contemplate continuation of our company as a going concern. At March 31, 2005,
we had an accumulated deficit of $3,712,302 and have realized a loss of $533,230
and incurred negative cash flow from operations of $606,762 for the three months
ended March 31, 2005. These factors raise substantial doubt as to our ability to
continue as a going concern.
The application of the going concern concept is dependent upon our
ability to receive continued financial support from our creditors, stockholders
and external investors and attaining profitable operations through the sale of
our software. The consolidated interim financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be necessary
should we be unable to continue as a going concern and, therefore, be required
to realize our assets and discharge our liabilities in other than the normal
course of operations. Management plans to obtain equity and debt financing from
external investors and to actively market our network security applications.
Management believes the plans described above will be sufficient to
meet our liabilities and commitments as they become payable over the next twelve
months. There can be no assurance that management's plans will be successful.
Failure to obtain the support of additional external investors to finance the
development and marketing of our network security applications will cause us to
curtail operations and impair our ability to continue as a going concern.
15
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated interim financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these consolidated interim financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to the valuation of accounts receivable and
inventories, the impairment of long-lived assets, any potential losses from
pending litigation and deferred tax assets or liabilities. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, we believe that
our estimates, including those for the above-described items, are reasonable.
REVENUE RECOGNITION. In accordance with the provisions of the American
Institute of Certified Public Accountant's Statement of Position 97-2 "Software
Revenue Recognition," revenue from software license sales, both directly and
through value-added resellers, is recognized once delivery has occurred,
evidence of an arrangement exists, the fee is fixed and determined and
collection of the fee is probable, provided there are no significant vendor
obligations remaining. We estimate allowances for returns arising from warranty
provisions based on historical experience. For multiple element arrangements,
where Vendor Specific Objective Evidence ("VSOE") of fair value is available for
all elements, the contract value is allocated to each element proportionately
based upon relative VSOE of fair value and revenue is recognized separately for
each element. Where VSOE of fair value is available for all undelivered
elements, the residual method is used to value the delivered elements. Where
VSOE of fair value is not available for an undelivered element all revenue for
the arrangement is deferred until the earlier of the point at which VSOE does
exist or all elements of the arrangement have been delivered, unless the
undelivered elements are post contract customer support arrangements, in which
case the arrangement revenue is recognized ratably, or services, in which case
the arrangement revenue is recognized as the services are provided. Periodically
we sell to value-added resellers ("VAR") under terms consistent with those
applied to other customers. We do not offer price protection or rights of return
to VARs and consideration terms and sales are not dependent on the option of the
resellers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Revenues from operations decreased from $754,575 for the three-month
period ended March 31, 2004 to $35,882 for the three-month period ended March
31, 2005. Revenue for the first quarter of 2005 included $5,874 of revenue from
the support and maintenance portion of the Source Code Licensing Agreement, as
well as revenue from licensing of our Winc Manager, Winc, pocketWinc and
recently introduced AirPatrol Mobile, AirPatrol Sentinel and AirPatrol
16
Enterprise software products. Our revenues during the 2005 first quarter were
significantly lower compared to the same period during 2004; however, almost all
of the difference is attributable to the Source Code Licensing Agreement that
closed in the first quarter of 2004. All of the payments due to us under this
agreement were paid at the time of the contract and, at this time, we do not
anticipate any further payments. Management is seeking to enter into other
license agreements for our technology during the next 12 months; however, there
are no assurances that we will be successful in entering into any such
agreements.
Our net loss for the three-month period ended March 31, 2005 was
$533,230 compared to net income of $299,449 for the three-month period ended
March 31, 2004. The difference between the net loss in first quarter 2005
compared to the net income in 2004 is primarily due to the Source Code Licensing
Agreement which was closed in the first quarter of 2004. This event led to
$719,126 of revenue to be recognized in the first quarter of 2004 from the
Source Code Licensing Agreement. This licensing agreement was not renewed in
2005, and therefore, only $5,874 of Source Code licensing revenue was recognized
in the first quarter of 2005, which was related to the maintenance and support
portion of the contract, which was completed on January 20, 2005.
Expenses were also higher in the first three months of 2005 compared to
2004. During the three month period ended March 31, 2005 the most dramatic
increases in expenses over the first quarter of 2004 were in the areas of
advertising and promotion (77%), consulting fees (152%), professional fees
(75%), and salaries and benefits (102%). Advertising and promotion increased to
$70,170 in first quarter 2005 compared to $39,737 in first quarter 2004 as we
developed a more aggressive marketing policy in early January given the late
2004 launch of our Air Patrol line of products. Professional fees in the first
three months of March 2005 were $59,034 compared to $33,660 to March 31, 2004
due to legal fees and accounting fees incurred in the first quarter of 2005
relating to the preparation and review of securities filings related to the
requirements of the financing that closed on December 22, 2004. Salaries and
benefits for the first quarter 2005 were $110,579 compared to $54,643 for first
quarter 2004 as a result of our having three more employees in first quarter
2005 than in first quarter 2004, two new employees being added to the marketing
department as part of our aggressive marketing campaign launched in the first
quarter of 2005. In first quarter 2005, consulting fees increased from $78,899
in first quarter 2004 to $198,639 in first quarter 2005. The increase in
consulting fees from first quarter 2004 is due to increased fees paid for online
marketing initiatives, corporate finance initiatives and the expensing of the
fair value of shares released from escrow in consideration of services totaling
approximately $47,920. This agreement went into effect in the third quarter of
2004 and thus was not included in first quarter 2004 comparative consulting
fees. Research and development expenses were lower in first quarter 2005
compared to first quarter 2004 due to the fact that first quarter 2004 included
$100,000 of purchased research and development. We also reached an agreement
with a vendor during the quarter to terminate services which resulted in our
recording a recovery of $50,000 of expenses that had been accrued in accounts
payable as at December 31, 2004.
Dividends of $24,658 were accrued to March 31, 2005 related to
redeemable, convertible preferred stock issued on December 22, 2004. Accretion
of the discount to the redeemable,
17
convertible preferred stock, with respect to a beneficial conversion option and
warrants issued in connection with preferred stock, of $12,100 was recorded to
March 31, 2005 as well as amortization of deferred financing costs of $800. No
cash dividends were declared during the three month period ended March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As at March 31, 2005, we had cash of $687,217 and a working capital
deficiency of $17,601, as compared to cash of $1,308,086 and a working capital
surplus of $497,618 at December 31, 2004. In late December 2004, we closed on a
financing resulting in net proceeds of $1,815,000. The cash provided by our
financing activities in late 2004 offset the $606,762 of cash used in operations
in the first quarter of 2005 and $11,455 used in investing activities.
Receivables of $23,948 at March 31, 2005 consisted of sales made on
Esellerate and Handango websites in March 2005 and paid to us in April 2005, as
well as refundable taxes from the Canadian government. The entire amounts
receivable at March 31, 2005 of $23,948 was collected in the second quarter of
2005. The amounts receivable at December 31, 2004 of $14,883 was collected in
the first quarter of 2005.
Prepaid expenses consisted of prepaid rent.
Property and equipment consisted of hardware equipment purchased from
independent suppliers in North America for the development of our products.
Consulting fees payable consisted of payables owed to two of our
officers, Nicholas Miller and Mitchell Burton. Consulting fees payable were
$96,366 compared to $134,611 as at December 31, 2004 as a settlement with an
employee that was accrued at year end in consulting fees payable was paid out in
first quarter 2005.
Deferred revenue at March 31, 2005 was nil as at December 31, 2004 the
outstanding amount was related to maintenance and support revenue in connection
with the Source Code Licensing Agreement, which was recognized each month for
the 12 months from January 21, 2004 to January 20, 2005, and so by March 31,
2005 all revenue relating to this contract had been recognized.
Accounts payable decreased from March 31, 2005 to December 31, 2004 due
almost entirely to the fact that we terminated an agreement with a vendor during
the quarter which resulted in the recovery of $50,000 of accounts payable which
had been accrued as at December 31, 2004. This recovery has been segregated on
the income statement as a separate line item.
In April 2004, we received $2,000,000 in funds from a private investor
in connection with a private placement offering pursuant to an irrevocable
subscription agreement. During the quarter ended June 30, 2004, the investor
requested that his investment be rescinded and, without waiving any of our
rights we may have against the investor under the subscription agreement, we
returned $1,500,000 to the investor of the $2,000,000 received. In connection
with the private
18
placement, we paid a $100,000 finder's fee. During the quarter ended June 30,
2004, we recovered the finder's fee, which we returned to the investor as well.
It is our intent to return the $400,000 balance of the investment only when the
investor enters into a mutual settlement agreement acceptable to us. Even though
we have offered to return the remaining $400,000 to the investor if the investor
executes a mutual settlement agreement, the investor has refused to execute the
settlement agreement. We have informed the investor that if he continues to
refuse to execute the settlement agreement, we will enforce the terms of the
subscription agreement relating to the remaining $400,000 and issue shares of
our common stock and common stock purchase warrants in accordance with the terms
of the subscription agreement. The investor has indicated that he may initiate
an action to recover the remaining $400,000. Although we have returned
$1,600,000 of the $2,000,000 invested, we have not admitted to any facts or
circumstances that would support a legal right to rescind the investment and we
intend to vigorously defend any legal action on that basis. The $400,000 is
reflected as share subscriptions payable at March 31, 2005.
In December 2004, we entered into securities purchase agreements with
several accredited investors pursuant to which we agreed to sell, and the
investors agreed to purchase, 2,000 shares of Series B 5% Redeemable Convertible
Preferred Stock, warrants to purchase 2,325,584 shares of common stock, and
Additional Investment Rights for a total of $2,000,000. The warrants are
exercisable for five years at $0.55 per share. The preferred stock may be
converted in shares of common stock at a price of $0.43 per share. The
Additional Investment Rights entitle the investors to buy up to $4,000,000 of
preferred stock and warrants on the same terms for period of six months
following the effective date of the registration statement we agreed to file, of
which this prospectus is a part. We disclosed, as a subsequent event, the
receipt of common share subscriptions totaling $250,000 in our September 30,
2004 consolidated interim financial statements. The subscriber agreed to apply
its $250,000 investment to purchase 250 shares of preferred stock in connection
with this financing.
In connection with the subscription, we paid Ascendiant Securities, LLC
a cash commission of $160,000 and a non-accountable expense allowance of
$25,000, and issued Ascendiant warrants for the purchase of up to 1,674,419
shares of common stock at $0.55 per share. The warrants are exercisable for a
five-year period commencing from the date on which the right to exercise the
warrants vested. The warrants are currently vested as to 372,093 shares. Further
vesting will occur as warrants and the Additional Investment Right securities
are exercised. The warrants contain piggyback registration rights and a net
exercise provision.
In April 2005, we and the investors who purchased the Additional
Investment Rights determined to restructure the Additional Investment Rights to
some other form of equity security. We expect to finalize the terms of the
restructured security in May 2005.
PLAN OF OPERATION
We believe we do not have sufficient funds to cover our operating
overhead for the next twelve months. While we had approximately $687,000 of cash
at March 31, 2005, our projected "burn rate" for the current fiscal three month
period is approximately $180,000 per month. This
19
cash flow rate is representative of the capital requirements over the
twelve-month period from the date of the prospectus, based on our current growth
plan. We anticipate that, if sufficiently funded over the next twelve months,
our focus will be: marketing our products, supporting customers, and conducting
on-going research and development.
Accordingly, we estimate that we will need cash from one or more
external sources of approximately $700,000 to $800,000 over the next twelve
months. While we issued warrants as part of our December 2004 private placement
that could potentially result in gross proceeds of $1,279,071 if fully
exercised, we cannot provide any assurance that any of the warrants will be
exercised. Therefore, we intend to conduct additional financings to raise funds
from private investors. However, there are no assurances that we will be able to
complete any such financings.
If we are successful in implementing our growth strategy, management
believes that we can undergo a period of rapid growth. For our AirPatrol
technology, we will actively search for more partners for the provision of
software licenses and related software consultancy and engineering services in
relation to its further development. Management expects AirPatrol Mobile,
AirPatrol Enterprise, AirPatrol Sentinel, AirSafe, Winc 2.1 and pocketWinc 2.0
to ship in greater numbers in 2005, and thus will require further software
developments and upgrades for the remainder of the year. We also intend to enter
into other license agreements for our technology, similar to the source code
licensing agreement described above, during the next 12 months; however, there
are no assurances that we will be successful in entering into any such
agreements.
On April 20, 2005, we announced that we would soon be shipping a range
of new network security solutions designed to protect wired and wireless
networks against the network security vulnerability arising from the deployment
of unauthorized wireless devices. Our suite of new solutions will include:
o AirSafe Enterprise - Cirond AirSafe Enterprise will provide network
administrators with a Microsoft Windows-based tool designed to "put
network administrators back in control of all the wireless-enabled
devices in the company." It is designed to allow them to control how,
when, where - and if users - can connect to wireless networks (and
limiting the networks to which they can connect). It will enable them
to set and enforce wireless usage policies.
o AirPatrol Enterprise Controller - AirPatrol Enterprise Controller will
be a network security appliance based on standard, rack-mounted server
technology that puts all the capabilities Cirond's existing AirPatrol
Enterprise wireless network security and management technology into a
single, easily installable server.
o AirPatrol Enterprise Central Console - AirPatrol Enterprise Central
Console software will enable network administrators to configure and
manage multiple AirPatrol Enterprise installations and locations from
one central console. It will also allow users to connect to and control
AirPatrol Enterprise Server Edition (or AirPatrol Enterprise
Controller) installations through Microsoft Windows Remote Desktop
software.
20
o AirPatrol Enterprise Remote Viewer - AirPatrol Enterprise Remote Viewer
will be a Window-based software application that allows any network
manager to remotely view AirPatrol Enterprise Server Edition or
AirPatrol Enterprise Controller Floor Plan screens on any network from
which the software is installed.
Also in April 2005, we announced the appointment of Richard J.
Savastano as Vice President Sales. We believe that with the appointment of Mr.
Savastano, who has over ten years of information technology hardware and
software experience and the launch of our new network security products, our
sales revenues will increase significantly from the revenues reported for the
first quarter of this year.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any material off balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB, as well as
statements made by us in periodic press releases, oral statements made by our
officials to analysts and shareholders in the course of presentations about us,
constitute "forward-looking statements". Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors that may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by the forward
looking statements. There are many factors that could cause these
forward-looking statements to be incorrect including, but not limited to, the
following:
o our ability to generate desired technologies;
o the lack of liquidity of our common stock;
o the risks associated with technology companies;
o our ability to find and retain skilled personnel;
o availability of capital;
o the strength and financial resources of our competitors; and
o general economic conditions.
ITEM 3. CONTROLS AND PROCEDURES.
As required by SEC rules, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures at the end of the
period covered by this report. This evaluation was carried out under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer. Based on this
evaluation, these officers have concluded that the design and operation of our
disclosure
21
controls and procedures are effective. There were no changes in our internal
control over financial reporting or in other factors that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any pending legal proceedings.
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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibits:
----------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
----------------------------------------------------------------------
2.1 Stock Exchange Agreement by and between Cirond
Corporation (f/k/a eXmailit.com) and Seaside Holdings
Inc. (f/k/a Cirond Technologies Inc.) dated August 29,
2003 (1)
----------------------------------------------------------------------
2.2 First Amendment to Stock Exchange Agreement by and
between Cirond Corporation and Seaside Holdings Inc.
(f/k/a Cirond Technologies Inc.) dated November 13, 2003
(1)
----------------------------------------------------------------------
2.3 Articles of Exchange (2)
----------------------------------------------------------------------
3.1 Articles of Incorporation, as amended (3)
----------------------------------------------------------------------
3.2 Bylaws, as amended (4)
----------------------------------------------------------------------
4.1 Certificate of Designation of Series B 5% Convertible
Preferred Stock (5)
----------------------------------------------------------------------
10.1 Management Advisory Services Agreement with Amber Tiger
Holdings Corp. dated February 1, 2002 (2)
----------------------------------------------------------------------
10.2 Management Advisory Services Agreement with Headline
Technologies Ltd. dated February 1, 2002 (2)
----------------------------------------------------------------------
10.3 Management Advisory Services Agreement with Amber Tiger
Holdings Corp. dated January 1, 2004 (2)
----------------------------------------------------------------------
10.4 2004 Stock Option Plan (6)
----------------------------------------------------------------------
23
----------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
----------------------------------------------------------------------
10.5 Agreement with Regency Capital Partners dated October 1,
2004, as amended November 2, 2004 (7)
----------------------------------------------------------------------
10.6 Form of Securities Purchase Agreement dated as of
December 22, 2004 between Cirond Corporation and the
Purchasers named therein (5)
----------------------------------------------------------------------
10.7 Registration Rights Agreement dated December 22, 2004
between Cirond Corporation and the Purchasers named
therein (5)
----------------------------------------------------------------------
10.8 Form of Common Stock Purchase Warrant (5)
----------------------------------------------------------------------
10.9 Form of Additional Investment Right (5)
----------------------------------------------------------------------
10.10 Source Code License Agreement dated January 21, 2004
between Computer Associates International, Inc. and
Cirond Networks, Inc. (8)
----------------------------------------------------------------------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
----------------------------------------------------------------------
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
----------------------------------------------------------------------
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 of Chief Executive Officer
----------------------------------------------------------------------
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 of Chief Financial Officer
----------------------------------------------------------------------
------------------
(1) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated November 25, 2003, filed
December 5, 2003.
(2) Incorporated by reference to the exhibits to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 2003, filed May 10, 2004.
(3) Incorporated by reference to the exhibits to the registrant's
registration statement on Form 10-SB, filed April 29, 2002.
(4) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated December 17, 2004, filed
December 22, 2004.
(5) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated December 22, 2004, filed
December 23, 2004.
(6) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated September 20, 2004, filed
October 5, 2004.
(7) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated October 1, 2004, filed December
2, 2004.
(8) Incorporated by reference to the exhibits to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 2004, filed March 23, 2005.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CIROND CORPORATION
Date: May 11, 2005 By: /S/ DAVID REDEKOP
---------------------------------------
David Redekop
Chief Financial Officer
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