UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(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 SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
Commission File Number 000-50813
Sand Hill IT Security Acquisition Corp.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 20-0996152
(State or other Jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, California
(Address of Principal Executive Office)
(650) 926-7022
(Issuer's Telephone Number, Including Area Code)
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 [ ]
As of March 31, 2005, 5,110,000 shares of common stock, par value $.01 per
share, were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Index Page No.
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Part I: Condensed Financial Information
Item 1 - Financial Statements 3
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis or Plan of Operation 9
Item 3 - Controls and Procedures 10
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 14
Exhibit Index 15
PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
CONDENSED BALANCE SHEETS
March 31, 2005
(Unaudited) December 31, 2004
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ASSETS
Current assets:
Cash............................................................................ $ 697,785 $ 783,133
Treasury securities held in trust, at market ................................... 21,220,292 21,100,510
Prepaid expenses................................................................ 101,287 132,131
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Total current assets....................................................... 22,019,364 22,015,774
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Total Assets.................................................................... $ 22,019,364 $ 22,015,774
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses...................................... $ 60,270 $ 15,772
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Total Liabilities............................................................... 60,270 15,772
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Stockholders' Equity:
Preferred stock, $0.01 par value
Authorized 5,000,000 shares; none issued................................... $ - $ -
Common stock, $0.01 par value
Authorized 50,000,000 shares
Issued and outstanding, 5,110,000 and 5,110,000 shares, respectively....... 51,100 51,100
Additional paid-in capital...................................................... 22,006,151 21,998,809
Deficit accumulated during the development stage................................ (98,157) (49,907)
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Total Stockholders' Equity...................................................... 21,959,094 22,000,002
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Total Liabilities and Stockholders' Equity...................................... $ 22,019,364 $ 22,015,774
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See accompanying notes to condensed financial statements.
3
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
CONDENSED STATEMENTS OF OPERATIONS
Three months Period from April 15
ended March 31, (inception) to
2005 March 31, 2005
(Unaudited) (Unaudited)
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Formation and operating costs................................................. $ 172,148 $ 364,094
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Operating loss................................................................ (172,148) (364,094)
Interest income and mark to market gain....................................... 123,898 265,937
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Net loss...................................................................... $ (48,250) $ (98,157)
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Weighted Average Shares Outstanding........................................... 5,110,000 3,896,928
Net loss Per Share (Basic and Diluted)........................................ $ (0.01) $ (0.02)
See accompanying notes to condensed financial statements.
4
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
CONDENSED STATEMENTS OF CASH FLOWS
Three months Period from April 15
ended March 31, (inception) to
2005 March 31, 2005
(Unaudited) (Unaudited)
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CASH FLOW FROM OPERATING ACTIVITIES
Net loss.................................................................... $ (48,250) $ (98,157)
Accretion of treasury bill and mark to market gain.......................... (119,782) (195,292)
Increase in prepaid expenses................................................ 30,844 (101,287)
Increase in accounts payable and accrued expenses........................... 44,498 60,270
Compensation expense related to issuance of
Advisory Board Options.................................................. 7,341 9,788
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Net cash provided by (used in) operating activities........................... (85,348) (324,677)
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CASH FLOW FROM INVESTING ACTIVITIES
Purchase of treasury bill in trust account.................................. -- (21,025,000)
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Net cash used in investing activities......................................... -- (21,025,000)
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CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from sale of common stock to initial stockholders.......... -- 25,000
Gross proceeds from public offering......................................... -- 24,660,000
Costs of public offering.................................................... -- (2,637,538)
Proceeds from stockholder loan.............................................. -- 40,000
Repayment of stockholder loan.............................................. -- (40,000)
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Net cash provided by financing activities..................................... -- 22,047,462
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NET INCREASE (DECREASE) IN CASH............................................... (85,348) 697,785
CASH AT BEGINNING OF PERIOD................................................... 783,133 -
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CASH AT END OF PERIOD......................................................... $ 697,785 $ 697,785
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See accompanying notes to condensed financial statements.
5
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements included herein for the quarterly period ended
March 31, 2005 and the period from inception (April 15, 2004) to December 31,
2004 and March 31, 2005, have been prepared by Sand Hill IT Security Acquisition
Corp. (the "Company") without audit pursuant to the rules and regulations of the
United States Securities and Exchange Commission ("SEC"). Accordingly, these
statements reflect all adjustments (consisting only of normal recurring
entries), which are, in the opinion of the Company, necessary for a fair
presentation of the financial results for the interim periods. Certain
information and notes normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. Operating results for the interim periods
presented are not necessarily indicative of the results that may be expected for
the full fiscal year. These financial statements should be read in conjunction
with the financial statements that were included in the Company's Annual Report
on Form 10-KSB for the period ended December 31, 2004.
2. ORGANIZATION, BUSINESS OPERATIONS
Sand Hill IT Security Acquisition Corp. was incorporated in Delaware on
April 15, 2004 as a blank check company whose objective is to merge with or
acquire an operating business in the IT security industry. The Company's initial
stockholders' purchased 1,000,000 shares of common stock, $0.01 par value, for
$25,000 on April 20, 2004.
The registration statement for the Company's initial public offering (the
"Offering") was declared effective on July 26, 2004. The Company consummated the
Offering on July 30, 2004 and received proceeds, net of the underwriters'
discount of $22,022,462. Subsequently, the underwriters exercised their over
allotment option and the Company received an additional $2,861,100 in proceeds,
net of the underwriters' discount. The Company's management has broad discretion
with respect to the specific application of the net proceeds of the Offering,
although substantially all of the net proceeds of the Offering are intended to
be generally applied toward consummating a merger with or acquisition of an
operating business in the IT security industry ("Business Combination"). There
is no assurance that the Company will be able to successfully affect a Business
Combination. An amount equal to $21,025,000 is being held in an interest bearing
trust account ("Trust Fund") until the earlier of (i) the consummation of its
first Business Combination or (ii) liquidation of the Company. Under the
agreement governing the Trust Fund, funds may only be invested in United States
government securities with a maturity of 180 days or less. The remaining
proceeds of the Offering may be used to pay for business, legal and accounting
due diligence on prospective mergers or acquisitions and continuing general and
administrative expenses.
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The Company, after signing a definitive agreement for the merger with or
acquisition of a target business, will submit such transaction for stockholder
approval. In the event that stockholders owning 20% or more of the outstanding
stock excluding, for this purpose, those persons who were stockholders
immediately prior to the Offering, vote against the Business Combination and
exercise their conversion rights, the Business Combination will not be
consummated. All of the Company's stockholders prior to the Offering, including
all of the officers and directors of the Company ("Initial Stockholders"), have
agreed to vote their founding shares of common stock in accordance with the vote
of the majority in interest of all other stockholders of the Company ("Public
Stockholders") with respect to a Business Combination. The Business Combination
will not be completed unless more than 50% of the Public Stockholders vote in
favor of the transaction. After consummation of the Company's first Business
Combination, these voting safeguards no longer apply.
With respect to the first Business Combination which is approved and
consummated, any Public Stockholder who voted against the Business Combination
may demand that the Company redeem his or her shares. The per share redemption
price will equal the amount in the Trust Fund as of the record date for
determination of stockholders entitled to vote on the Business Combination
divided by the number of shares of common stock held by Public Stockholders at
the consummation of the Offering. Accordingly, Public Stockholders holding
19.99% of the aggregate number of shares owned by all Public Stockholders may
seek redemption of their shares in the event of a Business Combination. Such
Public Stockholders are entitled to receive their per share interest in the
Trust Fund computed without regard to the shares held by Initial Stockholders.
The Company's Certificate of Incorporation provides for the mandatory
liquidation of the Company, without stockholder approval, in the event that the
Company does not consummate a Business Combination within 18 months from the
date of the consummation of the Offering (January 30, 2006), or 24 months from
the consummation of the Offering (July 30, 2006) if certain extension criteria
have been satisfied. In the event of liquidation, it is likely that the per
share value of the residual assets remaining available for distribution
(including Trust Fund assets) will be less than the initial public offering
price per share in the Offering (assuming no value is attributed to the Warrants
contained in the Units to be offered in the Offering as described in Note 3).
3. PUBLIC OFFERING
On July 30, 2004, the Company sold 3,600,000 units ("Units") in a public
offering, which included granting the underwriters' an over-allotment option to
purchase up to an additional 540,000 Units. Subsequently, the underwriters
exercised their over-allotment option and purchased an additional 510,000
shares. Each Unit consists of one share of the Company's common stock, $0.01 par
value, and two Redeemable common stock Purchase Warrants ("Warrants"). Each
Warrant will entitle the holder to purchase from the Company one share of common
7
stock at an exercise price of $5.00 commencing on the later of the completion of
a Business Combination or July 25, 2005 and expiring July 25, 2009. The Warrants
will be redeemable by the Company at a price of $0.01 per Warrant upon 30 days'
notice after the Warrants become exercisable, only in the event that the last
sale price of the common stock is at least $8.50 per share for any 20 trading
days within a 30 trading day period ending on the third day prior to the date on
which notice of the redemption is given. In connection with the Offering, the
Company issued an option for $100 to the underwriters' to purchase 270,000 Units
at an exercise price of $7.50 per Unit. The Units issuable upon exercise of this
option are identical to those included in the Offering except that the exercise
price of the Warrants included in the Units will be $6.65 per share.
4. TREASURY SECURITIES
Treasury securities are classified as trading securities and are carried at
fair value, with gains or losses resulting from changes in fair value recognized
currently in earnings.
5. COMMITMENT
The Company presently occupies office space provided by an Initial
Stockholder and affiliate of the officers and directors of the Company. Such
affiliate has agreed that, until the acquisition of a target business by the
Company, it will make such office space, as well as certain office and
secretarial services, available to the Company, as may be required by the
Company from time to time. The Company has agreed to pay such affiliate $7,500
per month for such services commencing on July 31, 2004.
6. NOTE PAYABLE
Sand Hill Security, LLC, an Initial Stockholder and affiliate of the
officers and directors of the Company, entered into a revolving credit agreement
with the Company in the amount of $60,000. Advances under the credit facility
amounted to $40,000 as of July 30, 2004. The loan was repaid out of the net
proceeds of the Offering.
7. COMMON STOCK
At March 31, 2005, 50,000,000 shares of $0.01 par value common stock were
authorized and 5,110,000 shares were outstanding.
8. PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock with
such designations, voting and other rights and preferences as may be determined
from time to time by the Board of Director.
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Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with the financial
statements and footnotes thereto incorporated by reference in this report.
Forward Looking Statements
Certain statements contained in this interim report that are not historical
facts, including, but not limited to, statements that can be identified by the
use of forward-looking terminology such as "may," "expect," "anticipate,"
"predict," "believe," "plan," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, and involve a number of risks and uncertainties. The actual results of the
future events described in such forward-looking statements in this interim
report could differ materially from those stated in such forward-looking
statements due to various factors, including but not limited to, our being a
development stage company with no operating history, our dependence on key
personnel some of whom may join us following a business combination, our
personnel allocating their time to other businesses and potentially having
conflicts of interest with our business, our potentially being unable to obtain
additional financing to complete a business combination, the ownership of our
securities being concentrated, risks associated with the IT security industry
and those other risks and uncertainties detailed in the Company's filings with
the Securities and Exchange Commission, including our Registration Statement on
Form S-1 that was declared effective July 26, 2004 and the definitive Prospectus
thereunder, our annual report on Form 10-KSB filed with the Securities and
Exchange Commission on March 31, 2005, and the uncertainties set forth from time
to time in the Company's filings and other public statements.
Plan of Operation
We were formed on April 15, 2004, to serve as a vehicle to effect a merger,
capital stock exchange, asset acquisition or other similar business combination
with an operating business in the IT security industry. We intend to utilize
cash derived from the proceeds of this offering, our capital stock, debt or a
combination of cash, capital stock and debt, in effecting a business
combination. We consummated the Offering on July 30, 2004. Our activities to
date have been comprised solely of organizational activities, preparing for and
consummating the Offering, and efforts associated with identifying a target for
a business combination.
The net proceeds from the Offering and the capital contributed by our
initial stockholders amounted to approximately $22.02 million. As of March 31,
2005, we had cash of $697,785, and treasury securities in our trust account (at
cost) of $21,025,000; a total of approximately $21.80 million. The difference
between the sum of our initial capital plus the net proceeds of the Offering
reduced by our cash and amount we placed in trust is approximately $300,000.
Through March 31, 2005, we have used $300,442 of the net proceeds that were not
deposited into the trust fund to pay general and administrative expenses. The
net proceeds deposited into the trust fund remain on deposit in the trust fund
and have earned $259,292 in interest and $6,645 on money market accounts through
March 31, 2005.
9
For the three months ended March 31, 2005, we earned interest income of
approximately $4,100 and recorded income from the accretion in value of our
trust account of approximately $119,800. We incurred operating expenses of
approximately $172,000 for that same period. Our expenses consist primarily of
professional fees, overhead fees, insurance, financial advisory fees, and
certain other expenses associated with being a public company.
Over the 24-month period subsequent to the consummation of the Offering, we
anticipate approximately $250,000 of expenses for legal, accounting and other
expenses related to the due diligence investigations, structuring and
negotiating of a business combination, $180,000 for the administrative fee
payable to Sand Hill Security, LLC ($7,500 per month for two years), $100,000 of
expenses for the due diligence and investigation of a target business, $75,000
of expenses in legal and accounting fees relating to our SEC reporting
obligations and $475,000 for general working capital that will be used for
miscellaneous expenses and reserves, including approximately $180,000 for
director and officer liability insurance premiums, inclusive of the amounts set
out in the preceding paragraph. We do not believe we will need to raise
additional funds in order to meet the expenditures required for operating our
business. However, we may need to raise additional funds through a private
offering of debt or equity securities if such funds are required to consummate a
business combination. We would only consummate such a fund raising
simultaneously with the consummation of a business combination.
We are obligated, commencing July 26, 2004, to pay to Sand Hill Security,
LLC, an affiliate of our directors and executive officers, a monthly fee of
$7,500 for general and administrative services. In addition, in April 2004, Sand
Hill Security, LLC advanced an aggregate of $40,000 to us, on a non-interest
bearing basis, for payment of offering expenses on our behalf. This amount was
repaid in August 2004 out of the proceeds of the Offering.
Item 3. Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and
procedures as of March 31, 2005 was made under the supervision and with the
participation of our management, including our chief executive officer and our
chief financial officer. Based on that evaluation, they concluded that our
disclosure controls and procedures are effective as of the end of the period
covered by this report to ensure that information required to be disclosed by us
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. During the most recently
completed fiscal quarter, there has been no significant change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Unregistered Sales of Equity Securities by Small Business Issuer.
None.
(b) Use of Proceeds.
On July 30, 2004, we closed the Offering of 3,600,000 Units, with each Unit
consisting of one share of our common stock and two warrants, each to purchase
one share of our common stock at an exercise price of $5.00 per share. The Units
were sold at an offering price of $6.00 per Unit, generating gross proceeds of
$21,600,000. Additionally, the underwriters' purchased 510,000 units, pursuant
to the exercise of the over-allotment option granted in connection with the
Offering, generating gross proceeds of $3,060,000. The representatives of the
underwriters in the Offering were I-Bankers Securities Incorporated and
Newbridge Securities Corporation. The securities sold in the Offering were
registered under the Securities Act pursuant to a registration statement on Form
S-1 (No. 333-114861). The Securities and Exchange Commission declared the
registration statement effective on July 26, 2004.
We paid a total of $2,250,900 in underwriting discounts and commissions,
including $648,000 for the underwriters' non-accountable expense allowance, and
approximately $386,000 for other costs and expenses related to the Offering.
After deducting the underwriting discounts and commissions and the Offering
expenses, the total net proceeds to us from the Offering were approximately
$22,022,462, of which $20,961,000 was deposited into a trust fund and the
remaining proceeds are available to be used to provide for business, legal and
accounting due diligence on prospective business combinations and continuing
general and administrative expenses.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Form of Advisor Stock Option Agreement
10.2 M&A Advisory Agreement, dated March 30, 2005, by
and between the Company and Software Equity Group,
L.L.C.
31.1 Section 302 Certification by CEO
31.2 Section 302 Certification by CFO
32.1 Section 906 Certification by CEO
32.2 Section 906 Certification by CFO
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(b) Reports on Form 8-K:
Date Items Financial Statements
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January 12, 2005 5.02, 9.01 None.
January 27, 2005 1.01, 8.01, and 9.01 None.
April 4, 2005 1.01 None.
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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.
Dated: May 16, 2005
SAND HILL IT SECURITY ACQUISITION CORP.
/s/ Humphrey P. Polanen
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Humphrey P. Polanen
Chief Executive Officer
/s/ Keith Walz
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Keith Walz
Chief Financial Officer and Secretary
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EXHIBIT INDEX
Number Description
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10.1 Form of Advisor Stock Option Agreement
10.2 M&A Advisory Agreement, dated March 30, 2005, by
and between the Company and Software Equity Group,
L.L.C.
31.1 Section 302 Certification by CEO
31.2 Section 302 Certification by CFO
32.1 Section 906 Certification by CEO
32.2 Section 906 Certification by CFO
14