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Firm Seeks Its Future Off the Public Markets

While some businesses may view being publicly traded as some sort of Holy Grail, at least one local firm decided to give up that status.

Edgewave Inc., a Rancho Bernardo software business, filed a request with the federal Securities and Exchange Commission to deregister its stock, and relieve the business from having to file all manner of reports with the agency.

Lou Ryan, Edgewave’s chief executive officer, said the change will result in “substantial savings” to the company, although he declined to reveal what the savings will be.

Companies whose shares trade on public markets must file reports with the SEC on a wide range of activities including quarterly and annual financial reports, acquisitions, and even significant personnel hires.

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Ryan said the costs involved with complying with all the regulations involving maintaining a public company status has risen above the benefits it receives.

“The expenses of managing a public company far outweigh the benefits of being a public company for us,” he said.

Shareholders Are Few

By deregistering the stock, the company’s current shareholders, who number only 142 according to the latest proxy report, won’t lose their shares, although the stock’s value could be affected, Ryan said.

Edgewave’s stock may still be quoted on its current exchange, the Pink Sheets, and can still be traded, “as long as market makers show an interest,” Ryan said.

For much of Edgewave’s recent life, interest in the stock, under the ticker EWVE.PK, has been minimal. Some 42,000 shares traded hands Oct. 22, but for much of the past several months the volume in trading was far below 10,000 shares. The stock price has ranged from 5 cents to 30 cents. A recent midweek price of 10 cents gave the company a market capitalization of $1.7 million.

Ryan, who owns nearly 16 percent of the stock, said besides the cost, the filing of public reports on the company’s operations gives his competitors knowledge about what they’re doing.

For example, Edgewave hired a new president in February, David Maquera, at an annual salary of $250,000 with a chance to earn a $75,000 bonus if he meets 100 percent of his goals.

Redeploying Resources

All the fees associated with legal and accounting services that go into filing reports with the SEC could be better spent elsewhere on the business, Ryan said. The firm also spends a considerable amount on internal staffing to comply with regulations, he said, without divulging how many employees are assigned to this work.

Edgewave went through some big changes in 2010 when it acquired another software business in Rohnert Park and changed its name from St. Bernard Software Inc. Last year, the company reported a net loss of $4.6 million, compared with a net loss in 2010 of $3.6 million. Revenue for both years was $18 million.

For the six months ended June 30, its net loss was $2.5 million, compared with a net loss of $3 million for the like period of 2011.

Ryan said on an operating basis, Edgewave is profitable. “Our performance this year has been good. The business is healthy and it’s improving every day,” he said.

Burdens and Benefits

Nikhil Varaiya, director of graduate programs at the College of Business Administration at San Diego State University, said public companies generally try to maintain that status because it gives the business visibility, and is an advantage in attracting investment. However, if the business is losing money, and there’s limited interest in the stock, deregistering the stock may save it some money, he said.

“It seems like they’re trying to save every penny they can,” Varaiya said. “They might as well be private.”

Steve Wallach, chief executive at AL International Inc., a Chula Vista-based, publicly traded nutrition food business, said he’s seen more small public companies trying to exit their public status because of all the costs associated with regulatory compliance.

When ALI acquired a Miami coffee distributor in July 2011 it also got its publicly traded designation on the Pink Sheets exchange. Wallach said he intends to get the business on the Over the Counter Bulletin Board exchange as a stepping stone to either the Nasdaq or American Stock Exchange.

The big benefit from having a presence on the stock markets is the liquidity that both employees and investors have. But if there’s only limited interest in the stock, and not much trading, paying for all the fees that go with regulatory compliance could be painful, he said.

He estimated ALI is paying about $1 million annually on all the costs that go with being public including accounting, auditing and personnel.

Ted Roth, president of Roth Capital Partners, a Newport Beach investment bank that helps companies raise funding, countered Wallach’s view, saying he hasn’t noticed any trend in more companies exiting the publicly traded markets.

Several years ago, with the imposition of new accounting rules on public companies, compliance costs rose to high levels, but those costs have come down dramatically, he said.

In fact, with the recently signed JOBS Act, the federal government actually loosened the rules covering how small companies can qualify for an initial public offering, reducing the number of years of audited financial statements from three years to two, Roth said.

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