WWW.EXFILE.COM, INC. -- 888-775-4789 -- BRIDGELINE SOFTWARE, INC. -- FORM 10-KSB
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-KSB
(Mark
One)
x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended September 30, 2008
o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ______________ to ______________
Commission
File Number 333-139298
Bridgeline
Software, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
52-2263942
|
|
State
or Other Jurisdiction of Incorporation
|
IRS
Employer Identification No.
|
|
10
Sixth Road
|
|
|
Woburn,
Massachusetts
|
01801
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
|
(781)
376-5555
|
|
(Issuer’s
telephone number)
|
Securities
registered under Section 12(b) of the Exchange Act:
|
Title of each class
|
Name of exchange on which
registered
|
|
Common
Stock, $0.001 par value per share
|
The
NASDAQ Stock Market, LLC
|
Securities
registered under Section 12(g) of the Exchange Act:
None
Check
whether issuer is not required to file reports pursuant to Section 13 or 15(d)
of the Exchange Acto.
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 Noo.
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB x.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yeso Nox
The
issuer’s revenues for its most recent fiscal year $21,295,000.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $5,303,093 based on the closing price of $0.65 of the
issuer’s common stock, par value $.001 share, as reported by NASDAQ on December
22, 2008.
As of
December 22, 2008, there were 10,894,414 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the definitive proxy statement for our
2008 annual meeting of stockholders, which is to be filed within 120 days after
the end of the fiscal year ended September 30, 2008, are incorporated by
reference into Part III of this Form 10-KSB, to the extent described in Part
III.
Transitional
Small Business Disclosure Format (check one): Yeso Nox
Forward
Looking Statement
Statements
contained in this Annual Report on Form 10-KSB that are not based on historical
facts are “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by the use of forward-looking terminology such as “should,”
“could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,”
“intends,” “continue,” or similar terms or variations of those terms or the
negative of those terms. These statements appear in a number of
places in this Form 10-KSB and include statements regarding the intent, belief
or current expectations of Bridgeline Software, Inc. Forward-looking statements
are merely our current predictions of future events. Investors are cautioned
that any such forward-looking statements are inherently uncertain, are not
guaranties of future performance and involve risks and uncertainties. Actual
results may differ materially from our predictions. Important factors that could
cause actual results to differ from our predictions include our limited
operating history, our license renewal rate, our ability to maintain our listing
on the Nasdaq Capital Market, the impact of the global financial deterioration
on our business, our inability to manage our future growth efficiently or
profitably, our inability to find, complete and integrate additional
acquisitions, the acceptance of our products, the performance of our products,
our dependence on our management team and key personnel, our ability to hire and
retain future key personnel or the impact of competition and our ability to
maintain margins or market share. Although we have sought to identify
the most significant risks to our business, we cannot predict whether, or to
what extent, any of such risks may be realized, nor is there any assurance that
we have identified all possible issues which we might face. We assume no
obligation to update our forward-looking statements to reflect new information
or developments. We urge readers to review carefully the risk factors described
herein and in the other documents that we file with the Securities and Exchange
Commission. You can read these documents at www.sec.gov.
Where we
say “we,” “us,” “our,” “Company” or “Bridgeline” we mean Bridgeline Software,
Inc.
PART
I
Overview
Bridgeline
Software is a developer of web application management software and award-winning
web applications that help organizations optimize business
processes. Bridgeline’s software and services help customers maximize
revenue, improve customer service and loyalty, enhance employee knowledge, and
reduce operational costs by leveraging web based
technologies.
Bridgeline’s
iAPPS®
Product Suite are SaaS (software as a service) solutions that unify
Content Management, Analytics, eCommerce, and eMarketing capabilities; enabling
business users to enhance and optimize the value of their web properties.
Combined with award-winning application development services, Bridgeline
believes it helps customers cost-effectively accommodate the changing needs of
today’s websites, intranets, extranets, and mission-critical web
applications.
The
iAPPS®
Product Suite is delivered through a SaaS business model, in which
we deliver our software over the Internet while providing maintenance, daily
technical operation and support.
Bridgeline
Software’s team of Microsoft®-certified
developers specialize in end-to-end web application development, information
architecture, usability engineering, SharePoint development, rich media
development, search engine optimization, and fully-managed application
hosting.
Products
and Services
Software
Products
On-Demand
(SaaS) Web Application Management Software - iAPPS®
Business
processes, regardless of industry or vertical market, fall into common
categories. Our research found companies must consistently address
issues surrounding security, workflow, version control, and user
management. While the processes of individual entities may vary, the
underlying elements mentioned above share common
characteristics. Over the last three and a half years, we have
developed a very powerful and scalable .NET application development framework
based on leveraging these common characteristics. We call our
framework iAPPS®.
The
iAPPS®
framework offers a unified, common set of shared services that are critical to
today’s business web environments. The iAPPS®
framework empowers companies and developers to create websites and web
applications with advanced business logic, state-of-the-art graphical user
interfaces, and improved quality – all in a shorter timeframe
with less
coding than is typically required by comparable products. The
iAPPS® framework
allows our application development teams to develop web applications based on
analyzing and optimizing our customers’ business processes, and then map the
results to a common software component solution. While a very powerful concept
on its own, the real synergies come together when the iAPPS®
framework is combined with the iAPPS® product
suite of website and application management products. The iAPPS® product
suite includes:
|
·
|
iAPPS®
Content Manager (general release in September 2008) allows non-technical
users to create, edit, and publish content via a browser-based interface.
The advanced, easy-to-use interface allows businesses to keep content and
promotions fresh - whether for a public commercial site or a company
intranet. The iAPPS®
Content Manager handles the presentation of content based on a
sophisticated indexing and security scheme that includes management of
front-end access to online applications. The system provides a robust
library functionality to manage permissions, versions and organization of
different content types, including multimedia files and images.
Administrators are able to easily configure a simple or advanced
workflow. The system can accommodate the complexity of larger
companies with strict regulatory policies. In addition, the open nature of
the iAPPS® Framework
allows for the integration of this content management system functionality
into any .NET-based web
application.
|
|
·
|
iAPPS®
Analytics (in development) provides Bridgeline Software customers the
ability to manage, measure and optimize their web presence by recording
detailed events and subsequently mine data within a web application for
statistical analysis. Our customers have access to information regarding
where their visitors are coming from, what content and products their
viewers are most interested in, and how they navigate through a particular
web application. Through user-definable web reports, iAPPS® Analytics
provides insight into areas like visitor usage, content access, age of
content, actions taken, and event triggers, and reports on both client and
server-side events. iAPPS® Analytics
may also be used to track events and create integrated reports across the
entire iAPPS®
product suite including campaign management (iAPPS® Marketier),
content management (iAPPS® Content
Manager) and commerce (iAPPS® Commerce).
|
|
·
|
iAPPS®
Commerce (planned released in 2009) will provide an online eCommerce
solution to assist Bridgeline’s customers in maximizing and managing all
aspects of their commerce initiatives. The customizable dashboard will
provide customers with a real-time overview of the performance of their
online stores, such as sales trends, demographics, profit margins,
inventory levels, inventory alerts, fulfillment deficiencies, average
check out times, potential production issues, and delivery times. Commerce
will also provide backend access to payment and shipping gateways. In
combining iAPPS® Commerce
with Analytics and Marketier, our customers can take their commerce
initiatives to a new level by personalizing their product offerings,
improving their marketing effectiveness, and providing value-added
services or cross selling products.
|
|
·
|
iAPPS®
Marketier (planned release at the end of 2009) will provide a marketing
lifecycle management tool that will include customer transaction analysis,
email management, surveys and polls, event registration and issue tracking
to measure campaign return on investments and client satisfaction. Web
site content and user profiling will be leveraged to deliver targeted
campaigns and stronger customer relationships. The email management
features will provide comprehensive reporting capabilities including
success rate, and recipient activity such as click-thrus and opt-outs. The
iAPPS®
Marketier will integrate with leading customer relationship management
systems (CRM’s) such as Salesforce.com and leading ad banner engines such
as Google.
|
The
iAPPS®
framework and product suite are available as a Software-as-a-Service (SaaS)
business model, with associated maintenance, daily technical operation, and
support, or as a commercially licensed and supported internal solution for
customers preferring a dedicated server environment (within their firewall or at
one of our facilities). Due to the flexibility of the core
architecture, the iAPPS®
framework and product suite can also be sold as a traditional perpetual software
license arrangement.
Orgitecture
TM
Our
Orgitecture TM
platform, developed several years ago, provides customers with a suite of
on-demand (SaaS) Web-based tools designed to streamline Web site management and
reduce web related development costs. Orgitecture software modules
include web content management, survey tools, calendaring, email
newsletters, online registration, and ecommerce functions.
Our newly
developed iAPPS® web
application management software will replace Orgitecture. We plan to
migrate Orgitecture customers to the iAPPS®
Framework over the next 18-24 months. Orgitecture customers have been notified
that all R&D on the Orgitecture platform has been suspended and that the
company will be sun-setting and no longer provide support for the product on
December 31, 2010.
Base
10 TM
Base10 TM is a
web based on-demand SaaS platform the Company obtained through the acquisition
of Tenthfloor, Inc on January 31, 2008. Base10 provides customers
with a suite of on-demand (SaaS) Web-based tools that provides integrated
content management, emarketing management, and ecommerce.
Our newly
developed iAPPS® web
application management software will replace Base10. We plan to
migrate Base10 customers to the iAPPS®
Framework over the next 18-24 months. Base10 customers have been
notified that all R&D on the Base10 platform has been suspended and that the
company will be sun-setting and no longer provide support for the product on
December 31, 2010.
PowerShop
TM
PowerShop TM is a
web based eCommerce product the Company obtained through the acquisition of
Objectware, Inc on July 5, 2007. PowerShop provides customers with
ecommerce capabilities in a coordinated set of tools and services designed to
attract new customers and deliver an overall user friendly and satisfying
customer experience while automating many required business processes for
effective customer service, merchandising and marketing, as well as inventory
management, tracking, and reporting.
Our newly
developed iAPPS® Commerce
product will replace PowerShop when released in mid 2009. We plan to
migrate PowerShop customers to iAPPS® Commerce
over the next 18-24 months.
Revenue
from sales of on-demand SaaS web tools is reported as Subscriptions in the
accompanying financial statements.
Revenue
from sales of perpetual software license sales is reported as $224 thousand in
the accompanying financial statements.
Application
Development Services
Application
Development
Application
development services address specific customer needs such as usability
engineering, information architecture, application development, rich media
development, and search engine optimization. We sell these custom
services through our internal direct sales force. Application
development engagements often include our software products or hosting
arrangements that provide for the use of certain hardware and infrastructure at
one of our co-managed network operating centers. Application
development services are often sold as part of multiple element arrangements
wherein retained professional services and/or hosting (i.e., Managed Services)
are provided subsequent to completion of the application
development.
Information
Architecture
Information
Architecture is a design methodology focused on structuring information to
ensure that users can find the appropriate data and can complete their desired
transactions within a Web site or application. Understanding users
and the context in which users will be initiating with a Web application is
central to information architecture. Information architects try to
put themselves in the position of a typical user of an application to better
understand a user’s characteristics, behaviors, intentions and
motivations. At the same time, the information architect develops an
understanding of a Web application’s functionality and data
structures. The understanding of these components enables the
architect to make customer centric decisions about the end user and then
translate those decisions into site maps, wire frames and clickable
prototypes.
Information
architecture forms the foundation of a Web application’s
usability. The extent to which a Web application is user-friendly and
is widely adopted by a user base is primarily dependent on the success of the
information architecture. Information architecture defines how well
users can navigate through a Web site or application and how easily they can
find the desired information or function. As Web application
development becomes more standard and commoditized, information architecture
will increase as a differentiator for application developers.
Usability
Engineering
The Web
was originally conceived as a hypertextual information space, but the
development of increasingly sophisticated user interfaces and applications has
fostered its use as a remote software interface. This dual nature has led to
much confusion, as user experience has been mixed. Today, usability engineering
is a critical component towards developing any successful Web based
application.
By
integrating usability into traditional Web development life cycles, we believe
our usability engineers can significantly enhance a user
experience. Our usability professionals provide the following
services: usability audits, information architecture, process
analysis and optimization, interface design and user testing.
Our
systematic and user-centered approach to application development
focuses on developing Web applications that are intuitive, accessible, engaging,
and effective. Our goal is to produce a net effect of increased traffic,
improved visitor retention, increased user productivity, reduced user error,
lower support cost, and reduced long-term development cost.
Search
Engine Optimization (SEO)
Bridgeline
Software helps customers maximize the
effectiveness of their online marketing activities to ensure that their web
applications can be exposed to the potential customers that use search engines
to locate products and services. Bridgeline’s SEO services include competitive
analysis, website review, keyword generation, proprietary leading page
technology, ongoing registration, monthly reports, and monitoring.
Revenue
from the above application development services is reported as Application Development
Services in the accompanying financial statements.
Managed Services (including Hosting)
Many of
our customers hire us to host and manage the applications we develop.
Bridgeline provides a complete outsourcing solution through our fully managed
hosting services. Our hosting facility includes dedicated in-house
production and development servers, as well as a dedicated, 24-hour
monitored co-location facility for mission critical
applications.
Through
our partnership with Savvis and Internap, we offer co-location services in
state-of-the-art data centers. We provide 24/7 application monitoring,
emergency response, version control, load balancing, managed firewall security,
and virus protection services. We provide shared hosting, dedicated
hosting, and SaaS hosting for our customers.
We also
offer our customers retained professional services. These
services are either contracted for on an “on call” basis or for a certain amount
of hours each month. Such arrangements generally provide for a
guaranteed availability of a number of processional services hours each month on
a “use it or lose it” basis.
Revenue
from Managed Services are reported as Managed Services in the
accompanying financial statements.
Sales
and Marketing
Bridgeline
Software employs a direct sales force and each sale is typically a time
intensive sale taking anywhere from 30 days to 180 days on average to
consummate. Our direct sales force focuses its efforts selling to
medium-sized business and large business. These businesses are typically in the
following vertical markets: Financial services, life sciences, high
technology, foundations, professional sports management
and transportation and storage.
We have
eight geographic locations in the United States with full-time professional
direct sales staffs. Our geographic locations are in the metropolitan
Atlanta, Boston, Chicago, Cleveland, Denver, Minneapolis, New York, Washington
DC areas.
Four
phase engagement methodology
We use an
accountable, strategic engagement process developed specifically for target
companies that require a technology based professional approach, such as middle
market type companies. We believe it is critical to qualify each
opportunity and to assure our skill set and tools match up well with the
customer’s needs. As an essential part of every engagement, we believe our four
phase engagement methodology streamlines our customer qualification process,
strengthens our relationship with our customer, ensures our skill set and tools
match the customer’s needs, and we believe results in the submission of accurate
proposals.
Organic
growth from existing customer base
We have
specific programs that consistently market our brand, application development
software, and our services. Our business development professionals seek ongoing
business opportunities within our customer base and within other operating
divisions or subsidiaries of our existing customer base.
New
customer acquisition
In the
geographies in which we operate, we identify target customers within our
vertical expertise (financial services, life sciences, high technology,
foundations, professional sports management and transportation and storage). Our
business development professionals develop an annual territory plan identifying
various strategies to engage our target customers.
Customer
retention programs
We use
email marketing capabilities when marketing to our customer base. We email
eNewsletters, internally generated whitepapers, and Company announcements to our
customers. In addition we host educational on-line seminars on a regular
basis.
New
lead generation programs
We
generate targeted leads and new business opportunities by leveraging on-line
marketing strategies. We receive leads by maximizing the search engine
optimization of our own web site. Through our web site, we provide various
educational white papers and promote upcoming on-line seminars. In addition we
pay for banner advertisements on various independent newsletters, and paid
search advertisements that are linked to our web site. We also participate and
exhibit at targeted events.
Acquisitions
Bridgeline
Software plans to expand its distribution of iAPPS® and its
application development services throughout North America. Due to the
individualized nature of our sales process and delivery requirements, we believe
local staff is required in order to maximize market-share results.
We
believe the web application development market in North America is growing and
is fragmented. We believe that established yet small application development
companies have the ability to market, sell and install our iAPPS®
Framework and web application management software in their local metropolitan
markets. In addition, we believe that these companies also have a
customer base and a niche presence in the local markets in which they operate.
We believe there is an opportunity for us to acquire multiple companies that
specialize in web application development and are based in other large North
American cities in which we currently do not operate. We believe by
acquiring certain of these companies and applying our business practices and
efficiencies, we can accelerate our time to market in areas other than those in
which we currently operate.
During
fiscal 2008, we have completed the following two acquisitions:
|
·
|
In
January 2008, we acquired Tenth Floor, Inc., a Cleveland, Ohio-based
company, with a satellite operation in Minneapolis,
Minnesota.
|
|
·
|
In
July 2008, we acquired Indigio Group, Inc., a Denver, Colorado-based
company.
|
We
believe these acquisitions contribute to our business strategy by providing us
with new geographical distribution opportunities, an expanded customer base, an
expanded sales force and an expanded developer force. In addition, integrating
the acquired businesses into our existing operations allows us to consolidate
the finance, human resources, legal marketing, research and development, and
other expenses of the acquired businesses with our own, reducing the aggregate
of these expenses for the combined businesses, and resulting in improved
over-all operating results.
Our
software development efforts reside in our development center located in
Bangalore, India. We invested approximately $1.2 million in research
and development activities for the fiscal year ended September 30, 2008 which
included approximately $397 thousand in capitalized software costs, and we
invested approximately $791 thousand in research and development activities for
the fiscal year ended September 30, 2007. We believe the cost of
India based software developers are 70% lower than the cost of United States
based software developers.
We
employed 204 employees worldwide as of September 30,
2008. Substantially all of those employees are full time
employees.
We
primarily serve six markets that we believe have a history of investing in
information technology enhancements and initiatives. These markets
are:
|
·
|
Life
sciences & healthcare
|
|
·
|
High
technology (software and hardware)
|
|
·
|
Professional
sports management (teams and
Individuals)
|
|
·
|
Transportation
and storage
|
|
·
|
Foundations
and non profit organizations
|
We have
more than 600 customers of which one customer, Depository Trust Clearing
Corporation, generated 7% of revenue in the fiscal year ended September 30,
2008. No other customer generated more than 5% of revenue during such
period.
The
market for our products and services, including Web application development
software and Web application development services is highly competitive,
fragmented, and rapidly changing. Barriers to entry in such markets remain
relatively low. The markets are significantly affected by new product
introductions and other market activities of industry participants. With the
introduction of new technologies and market entrants, we expect competition to
persist and intensify in the future.
We
believe that we compete adequately with the others and distinguish ourselves
from our competitors in a number of ways. We believe that our
competitors generally offer their Web application development software without
directly providing application development services. In addition our
competitors that offer their Web application development software typically
offer only single point of entry type products as compared to a unified
framework approach. Our ability to develop applications on multiple
platforms and the existence of our own Web application development software
distinguishes us from our competition. We also believe that our
products have been designed for ease of use without substantial technical
skills. In addition to the above factors, we believe our Web
application development software has a lower cost of ownership than the
solutions provided by most of our competitors.
This
Annual Report on Form 10-KSB, as well as our quarterly reports on Form 10-QSB
and current reports on Form 8-K, along with any amendments to those reports, are
made available free of charge, on our website (www.bridgelinesw.com)
as soon as reasonably practicable after such material is electronically filed
with or furnished to the Securities and Exchange Commission. Copies
of the following are also available free of charge through our website under the
caption “Governance” and are available in print to any shareholder who requests
it:
|
·
|
Code
of Business Ethics
|
|
·
|
Committee
Charters for the following Board committees: Nominating and Corporate
Governance, Audit and Compensation committees
respectively.
|
The
public may read and copy any materials that we file with the SEC at the SEC’s
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information regarding the SEC’s Public Reference Room can be
obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains
an Internet site that contains reports, proxy and information statements, and
other information and can be found at (http://www.sec.gov).
This
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our objectives, expectations and intentions. The
cautionary statements made in this report are applicable to all forward-looking
statements wherever they appear in this report. Our actual results could differ
materially from those discussed herein. In addition to the risks discussed in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” our business is subject to the risks set forth below.
We
have a limited operating history on which to evaluate our operations and may
again incur losses in the future as we expand.
During
the most recent four years of operations, in 2005, 2006, 2007 and 2008, we had
revenues of approximately $5.8 million, $8.2 million, $11.2 million and $21.3
million, respectively, and net losses of $517,000, $1,448,000, $1,897,000 and
$10,272,000,
respectively. We have a limited operating history on which to base an evaluation
of our business and prospects. Since 2003, we have funded operations through
operating cash flows, when available, sales of equity securities, issuances of
debt and lines of credit. Any investment in our company is a high risk
investment because you will be placing funds at risk in an unseasoned early
stage company with unforeseen costs, expenses, competition and other problems to
which such companies are often subject. Our revenues and operating results are
difficult to forecast and our projected growth is dependent, in part, on our
ability to complete future acquisitions of prospective target companies and the
future revenues and operating results of such acquired companies. We therefore
believe that period-to-period comparisons of our operating results thus far
should not be relied upon as an indication of future performance.
As
we have a limited operating history, we may be unable to accurately predict our
future operating expenses, which could cause us to experience cash shortfalls in
future periods.
In order
to substantially grow our business both organically and through additional
acquisitions, we may, from time to time, require additional funding. There can
be no assurance that we will be able to raise any additionally needed funds on
acceptable terms or at all. The procurement of any such additional financing may
result in the dilution of your ownership interest in our company.
Because most of
our licenses are renewable on a monthly basis, a reduction in our license
renewal rate could reduce our revenues.
Our
customers have no obligation to renew their monthly subscription licenses, and
some customers have elected not to do so. Our license renewal rates may decline
or fluctuate as a result of a number of factors, including customer
dissatisfaction with our products and services, our failure to update our
products to maintain their attractiveness in the market, or constraints or
changes in budget priorities faced by our customers. A decline in license
renewal rates could cause our revenues to decline which would have a material
adverse effect on our operations.
We
may not be able to maintain our listing on the Nasdaq Capital Market if we are
unable to satisfy the minimum bid price requirements.
Our
common stock is currently listed for quotation on the Nasdaq Capital Market. We
are required to meet certain financial requirements in order to maintain our
listing on the Nasdaq Capital Market. One such requirement is that we maintain a
minimum closing bid price of at least $1.00 per share for our common stock. On
October 16, 2008, the Nasdaq Stock Market suspended the minimum bid price
requirement until January 16, 2009, and on December 19, 2008 extended this
suspension until April 20, 2009. Our common stock is currently
trading below $1.00 per share. If our common stock trades below $1.00 per share
for 30 consecutive business days, after the expiration of the temporary
suspension we will receive a deficiency notice from Nasdaq advising us that we
have 180 days to regain compliance by maintaining a minimum bid price of at
least $1.00 for a minimum of ten consecutive business days. If we fail to
satisfy the Nasdaq Capital Market’s continued listing requirements, our common
stock could be delisted from the Nasdaq Capital Market. Any potential delisting
of our common stock from the Nasdaq Capital Market would make it more difficult
for our stockholders to sell our stock in the public market and would likely
result in decreased liquidity and have a negative effect on the market price for
our shares.
The
recent financial crisis and current uncertainty in global economic conditions
could negatively affect our business, results of operations, and financial
condition.
The
recent financial crisis and the current uncertainty in global economic
conditions have resulted in a tightening in the credit markets, a low level of
liquidity in many financial markets, and extreme volatility in credit, equity
and fixed income markets. There could be a number of follow-on effects from
these economic developments on our business, including insolvency of customers;
decreased customer confidence; and decreased customer demand. Any of these
events, or any other events caused by the recent financial crisis, may have a
material adverse effect on our business, operating results, and financial
condition.
If we are unable
to manage our future growth efficiently, our business, revenues and
profitability may suffer.
We
anticipate that continued expansion of our business will be required to address
potential market opportunities. For example, we will need to expand the size of
our research and development, sales, corporate finance and operations staff.
There can be no assurance that our infrastructure will be sufficiently flexible
and adaptable to manage our projected growth or that we will have sufficient
resources, human or otherwise, to sustain such growth. If we are unable to
adequately address these additional demands on our resources, our profitability
and growth might suffer. Also, if we continue to expand our operations,
management might not be effective in expanding our physical facilities and our
systems, procedures or controls might not be adequate to support such expansion.
Our inability to manage our growth could harm our business and decrease our
revenues.
Our
recent acquisitions involve risks, including our inability to integrate
successfully their businesses and our assumption of liabilities.
We have
completed four acquisitions since our initial public offering in July
2007. We may not be able to integrate successfully any of such
acquired company’s business into our existing business. We cannot assure you
that we will be able to market the services provided by such acquired companies
with the other services we provide to customers. Further, integrating these
businesses may involve significant diversion of our management time and
resources and be costly. Our acquisitions also involve the risks that the
businesses acquired may prove to be less valuable than we expected and/or that
such businesses may have unknown or unexpected liabilities, costs and problems.
In entering into the definitive merger agreements with the acquired entities, we
relied on limited representations and warranties of each company’s principal
stockholders. Although we have contractual and other legal remedies for losses
that we may incur as a result of breaches of his agreements, representations and
warranties, we cannot assure you that our remedies will adequately cover any
losses that we incur.
If
we undertake additional business combinations and acquisitions, they may be
difficult to integrate into our existing operations, may disrupt our business,
dilute stockholder value or divert management’s attention.
During
the course of our history, we have acquired seven businesses. A key element of
our growth strategy is the pursuit of additional acquisitions in the fragmented
Web application development/services industry in the future. These acquisitions
could be expensive, disrupt our ongoing business and distract our management and
employees. We may not be able to identify suitable acquisition candidates, and
if we do identify suitable candidates, we may not be able to make these
acquisitions on acceptable terms or at all. If we make an acquisition, we could
have difficulty integrating the acquired technology, employees or operations. In
addition, the key personnel of the acquired company may choose not to work
for us. Acquisitions also involve the risk of potential unknown liabilities
associated with the acquired business.
If
our products fail to perform properly due to undetected errors or similar
problems, our business could suffer, and we could face product liability
exposure.
Complex
applications software we sell may contain undetected errors, or bugs. Such
errors can be detected at any point in a product’s life cycle, but are
frequently found after introduction of new software or enhancements to existing
software. We continually introduce new products and new versions of our
products. Despite internal testing and testing by current and potential
customers, our current and future products may contain serious defects. If we
detect any errors before we ship a product, we might have to delay product
shipment for an extended period of time while we address the problem. We might
not discover software errors that affect our new or current products or
enhancements until after they are deployed, and we may need to provide
enhancements to correct such errors. Therefore, it is possible that, despite our
testing, errors may occur in our software. These errors could result
in:
|
|
harm
to our reputation;
|
|
|
lost
sales;
|
|
|
delays
in commercial release;
|
|
|
product
liability claims;
|
|
|
contractual
disputes;
|
|
|
negative
publicity;
|
|
|
delays
in or loss of market acceptance of our products;
|
|
|
license
terminations or renegotiations; or
|
|
|
unexpected
expenses and diversion of resources to remedy
errors.
|
Furthermore,
our customers may use our software together with products from other companies.
As a result, when problems occur, it might be difficult to identify the source
of the problem. Even when our software does not cause these problems, the
existence of these errors might cause us to incur significant costs, divert the
attention of our technical personnel from our product development efforts;
impact our reputation or cause significant customer relations
problems.
If
we are unable to protect our proprietary technology and other intellectual
property rights, our ability to compete in the marketplace may be substantially
reduced.
If we are
unable to protect our intellectual property, our competitors could use our
intellectual property to market products similar to our products, which could
decrease demand for such products, thus decreasing our revenues. We rely on a
combination of copyright, trademark and trade secret laws, as well as licensing
agreements, third-party non-disclosure agreements and other contractual
measures, to protect our intellectual property rights. These protections may not
be adequate to prevent our competitors from copying or reverse-engineering our
products. Our competitors may independently develop technologies that are
substantially equivalent or superior to our technology. To protect our trade
secrets and other proprietary information, we require employees, consultants,
advisors and collaborators to enter into confidentiality agreements. These
agreements may not provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. The protective mechanisms we include in our products
may not be sufficient to prevent unauthorized copying. Existing copyright laws
afford only limited protection for our intellectual property rights and may not
protect such rights in the event competitors independently develop similar
products. In addition, the laws of some countries in which our products are or
may be licensed do not protect our products and intellectual property rights to
the same extent as do the laws of the United States.
Policing
unauthorized use of our products is difficult, and litigation could become
necessary in the future to enforce our intellectual property rights. Any
litigation could be time consuming and expensive to prosecute or resolve, result
in substantial diversion of management attention and resources, and materially
harm our business or financial condition.
If
a third party asserts that we infringe upon its proprietary rights, we could be
required to redesign our products, pay significant royalties or enter into
license agreements.
Although
presently we are not aware of any such claims, a third party may assert that our
technology or technologies of entities we acquire violates its intellectual
property rights. As the number of software products in our markets increases and
the functionality of these products further overlap, we believe that
infringement claims will become more common. Any claims against us, regardless
of their merit, could:
|
|
be
expensive and time consuming to defend;
|
|
|
result
in negative publicity;
|
|
|
force
us to stop licensing our products that incorporate the challenged
intellectual property;
|
|
|
require
us to redesign our products;
|
|
|
divert
management’s attention and our other resources; or
|
|
|
require
us to enter into royalty or licensing agreements in order to obtain the
right to use necessary technologies, which may not be available on terms
acceptable to us, if at all.
|
We
believe that any successful challenge to our use of a trademark or domain name
could substantially diminish our ability to conduct business in a particular
market or jurisdiction and thus decrease our revenues and result in possible
losses to our business.
If the security
of our software, in particular the hosted Internet solutions products we have
developed, is breached, our business and reputation could
suffer.
Fundamental
to the use of our products is the secure collection, storage and transmission of
confidential information. Third parties may attempt to breach our security or
that of our customers and their databases. We might be liable to our customers
for any breach in such security, and any breach could harm our customers, our
business and reputation. Any imposition of liability, particularly liability
that is not covered by insurance or is in excess of insurance coverage, could
harm our reputation, business and operating results. Computers, including those
that utilize our software, are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays or loss of data. We might be required to expend significant capital and
other resources to protect further against security breaches or to rectify
problems caused by any security breach, which, in turn could divert funds
available for corporate growth and expansion or future
acquisitions.
We
are dependent upon our management team, and the loss of any of these individuals
could harm our business.
We are
dependent on the efforts of our key management personnel. The loss of any of our
key management personnel, or our inability to recruit and train additional key
management and other personnel in a timely manner, could materially and
adversely affect our business, operations and future prospects. We do not
maintain a key man insurance policy covering any of our employees. In addition,
in the event that Thomas Massie, our founder, Chairman and Chief Executive
Officer, is terminated by us without cause, he is entitled to receive severance
payments equal to the greater of (a) three years’ total compensation, including
bonus amounts, or (b) $1 million. In the event we are required to pay the
severance
payments
to Mr. Massie, it could have a material adverse effect on our results of
operations for the fiscal quarter and year in which such payments are
made.
We
have shifted a significant portion of our software development operations to
India, which poses significant economic, political and security
risks.
A
significant portion of our software development activities are conducted by our
Bridgeline Software, Pvt. Ltd. subsidiary in Bangalore, India, in order to take
advantage of cost efficiencies associated with India’s lower wage scale. As of
September 30, 2008, we have 62 software development employees (39% of total
software development employees) at our Bangalore facility which represent
approximately 6% of our total development costs. However, we may not continue to
achieve the cost savings and other benefits we currently receive from these
operations and we may not be able to find sufficient numbers of developers with
the necessary skill sets in India to meet our needs as we grow. Due to our
activities in India, we are exposed to risks related to changes in the economic,
security and political conditions of India. Economic and political instability,
military actions and other unforeseen occurrences in India could impair our
ability to continue our software development in a timely manner, which could put
our products at a competitive disadvantage.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud. As a result,
current and potential shareholders could lose confidence in our financial
reporting, which would harm our business and the trading price of our
stock.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively minimize the possibility of fraud and its impact on our company. If
we cannot provide financial reports or effectively minimize the possibility of
fraud, our business reputation and operating results could be harmed. Inferior
internal controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price
of our stock.
In
addition, we will be required to include the management and auditor reports on
internal controls as part of our annual report for the fiscal year ending
September 30, 2008, pursuant to SOX Section 404, which requires, among
other things, that we maintain effective internal controls over financial
reporting and effective disclosure controls and procedures. In particular, we
must perform system and process evaluation and testing of our internal controls
over financial reporting to allow management and our independent registered
public accounting firm to report on the effectiveness of our internal controls
over financial reporting, as required by Section 404. Our compliance with
Section 404 will require that we incur substantial accounting expense and expend
significant management efforts.
We cannot
be certain as to the timing of the completion of our evaluation and testing, the
timing of any remediation actions that may be required or the impact these may
have on our operations. Furthermore, there is no precedent available by which to
measure compliance adequacy. If we are not able to implement the requirements
relating to internal controls and all other provisions of Section 404 in a
timely fashion or achieve adequate compliance with these requirements or other
SOX requirements, we might become subject to sanctions or investigation by
regulatory authorities such as the Securities and Exchange Commission or any
securities exchange on which we may be trading at that time, which action may be
injurious to our reputation and affect our financial condition and decrease the
value and liquidity of our securities, including our common stock.
Our
auditors identified material weaknesses in our internal controls over
financial reporting as of September 30, 2008 and September 30,
2007. Failure to achieve and maintain effective internal control over
financial reporting could result in our failure to accurately report our
financial results.
In
connection with its audit of our financial statements, our external auditors,
UHY LLP, advised us that they were concerned that as of and for the years ended
September 30, 2008 and September 30, 2007, our accounting resources did not
include enough people with the detailed knowledge, experience and training in
the selection
and application of certain accounting principles generally accepted in the
United States of America (GAAP) to meet our financial reporting needs. This
control deficiency contributed to material weaknesses in internal control with
respect to accounting for revenue recognition, equity and acquisitions. A
“material weakness” is a control deficiency or combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement in the financial statements or related disclosures will not be
prevented or detected.
During
the fiscal years ended September 30, 2007 and September 30, 2008, we created or
enhanced
several new positions in our Company, including our controller and a
vice-president level, with specific responsibilities for external financial
reporting, internal control, revenue recognition and purchase
accounting. We estimate that the annual cost of the new positions
referred to above will be between $300 thousand and $350 thousand. In
addition, we expect to incur significant additional costs in the
future.
While we
expect to complete the process of bringing our internal control documentation
into compliance with SOX Section 404 as quickly as possible, we cannot at this
time estimate how long it will take to complete the process or its ultimate
cost. We expect such costs to be significant.
We
face intense and growing competition, which could result in price reductions,
reduced operating margins and loss of market share.
We
operate in a highly competitive marketplace and generally encounter intense
competition to create and maintain demand for our services and to obtain service
contracts. If we are unable to successfully compete for new business and license
renewals, our revenue growth and operating margins may decline. The market for
our products, i.e., Web development services, content management products, asset
management products, e-Training products, foundations management products, and
Web analytics are competitive and rapidly changing, and barriers to entry in
such markets are relatively low. With the introduction of new technologies and
market entrants, we expect competition to intensify in the future. Some of our
principal competitors offer their products at a lower price, which may result in
pricing pressures. Such pricing pressures and increased competition generally
could result in reduced sales, reduced margins or the failure of our product and
service offerings to achieve or maintain more widespread market acceptance.
The Web
development/services market is highly fragmented with a large number of
competitors and potential competitors. Our primary public company competitors
are Web.com, Omniture, Cognizant Technology Solutions, and Vignette. We also
face competition from customers and potential customers who develop their own
applications internally. We also face competition from potential competitors
that are substantially larger than we are and who have significantly greater
financial, technical and marketing resources, and established direct and
indirect channels of distribution. As a result, they are able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products than we can. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share which could reduce our market share and decrease our
revenues.
Increasing
government regulation could affect our business and may adversely affect our
financial condition.
We are
subject not only to regulations applicable to businesses generally, but also to
laws and regulations directly applicable to electronic commerce. Although there
are currently few such laws and regulations, state, federal and foreign
governments may adopt laws and regulations applicable to our business. Any such
legislation or regulation could dampen the growth of the Internet and decrease
its acceptance. If such a decline occurs, companies may choose in the future not
to use our products and services. Any new laws or regulations in the following
areas could affect our business:
|
·
|
the
pricing and taxation of goods and services offered over the
Internet;
|
|
·
|
the
content of Websites;
|
|
·
|
consumer
protection, including the potential application of “do not call” registry
requirements on customers and consumer backlash in general to direct
marketing efforts of customers;
|
|
·
|
the
online distribution of specific material or content over the Internet;
or
|
|
·
|
the
characteristics and quality of products and services offered over the
Internet.
|
Because
competition for highly qualified personnel is intense, we might not be able to
attract and retain the employees we need to support our planned
growth.
We will
need to increase the size and maintain the quality of our sales force, software
development staff and professional services organization to execute our growth
plans. To meet our objectives, we must attract and retain highly qualified
personnel with specialized skill sets. Competition for qualified personnel can
be intense, and we might not be successful in attracting and retaining them. Our
ability to maintain and expand our sales, product development and professional
services teams will depend on our ability to recruit, train and retain top
quality people with advanced skills who understand sales to, and the specific
needs of, our target customers. For these reasons, we have experienced, and we
expect to again experience in the future, challenges in hiring and retaining
highly skilled employees with appropriate qualifications for our business. In
addition to hiring services personnel to meet our needs, we may also engage
additional third-party consultants as contractors, which could have a negative
impact on our financial results. If we are unable to hire or retain qualified
personnel, or if newly hired personnel fail to develop the necessary skills or
reach productivity slower than
anticipated,
it would be more difficult for us to sell our products and services, and we
could experience a shortfall in revenue and not achieve our planned
growth.
Item
2. Description of Properties
Our
headquarters are located twelve miles north of Boston, Massachusetts at 10 Sixth
Road, Woburn, Massachusetts 01801.This office also serves as our New England
business unit. The following table lists our offices, all of which are
leased:
|
|
|
|
|
|
|
|
|
Woburn,
Massachusetts 01801
|
|
professional
office space
|
|
|
|
|
|
professional
office space
|
|
|
|
|
|
professional
office space
|
|
|
|
71
Sona Towers, West Wing
Millers
Rd., Bangalore 560 052
|
|
professional
office space
|
|
|
|
|
|
professional
office space
|
|
|
|
30
N. LaSalle Street, 20th
Floor
|
|
professional
office space
|
|
|
|
2077
East 4th
Street, 2nd
Floor
|
|
professional
office space
|
|
|
|
800
Washington Ave. North Ste 500
|
|
professional
office space
|
|
|
|
410
17th
Street, Suite 600
|
|
professional
office space
|
In fiscal
2006, we also assumed a lease in conjunction with an acquisition for
professional office space located in Cambridge,
Massachusetts. Shortly after completing the acquisition, the
operations were consolidated into our Woburn, Massachusetts location and we
commenced subleasing this facility effective January 15, 2007.
Item
3. Legal Proceedings
From time
to time we are subject to ordinary routine litigation and claims incidental to
our business. As of September 30, 2008, Bridgeline Software is not
engaged with any material legal proceedings.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of the stockholders during the fourth quarter
of the fiscal year.
Part
II
Item
5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchase of Equity Securities
The
following table sets forth, for the periods indicated, the range of high and low
sale prices for our common stock. Our common stock trades on the NASDAQ Capital
Market under the symbol BLSW. Trading of our common stock commenced on June 29,
2007, following completion of our initial public offering.
|
Year
Ended September 30, 2008
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
2.48 |
|
|
$ |
1.18 |
|
|
Third
Quarter
|
|
|
3.66 |
|
|
|
2.25 |
|
|
Second
Quarter
|
|
|
3.65 |
|
|
|
2.45 |
|
|
First
Quarter
|
|
|
4.34 |
|
|
|
3.00 |
|
|
Year
Ended September 30, 2007
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
5.09 |
|
|
$ |
2.58 |
|
|
Third
Quarter
|
|
|
5.05 |
|
|
|
4.30 |
|
We have
not declared or paid cash dividends on our common stock and do not plan to pay
cash dividends to our shareholders in the near future. As of December 22, 2008,
our common stock was held by approximately 113 shareholders of
record.
Recent
Sales of Unregistered Securities; Use of Proceeds From Registered
Securities
The
following summarizes all sales of our unregistered securities during the fiscal
year ended September 30, 2008. The securities in each of the below-referenced
transactions were (i) issued without registration and (ii) were
subject to restrictions under the Securities Act and the securities laws of
certain states, in reliance on the private offering exemptions contained in
Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on
Regulation D promulgated thereunder, and in reliance on similar exemptions
under applicable state laws as a transaction not involving a public offering.
Unless stated otherwise, no placement or underwriting fees were paid in
connection with these transactions. Proceeds from the sales of these securities
were used for general working capital purposes.
Acquisitions
Tenth Floor, Inc. - The
acquisition of Tenth Floor, Inc. closed on January 31, 2008. At that
time, we issued an aggregate of 639,948 shares of our common stock to the four
stockholders of Tenth Floor as partial consideration in our
acquisition.
Indigio Group, Inc. – The
acquisition of Indigio Group, Inc., Inc. closed on July 1, 2008. At
that time we issued an aggregate of 1,127,810 shares of our common stock to the
eighteen stockholders of Indigio as partial consideration in our
acquisition.
The
securities issued as consideration in our acquisitions were issued to U.S.
investors in reliance upon exemptions from the registration provisions of the
Securities Act set forth in Section 4(2) thereof relative to sales by an issuer
not involving any public offering, to the extent an exemption from such
registration was required.
Contingent
Consideration
Objectware, Inc..
- In conjunction with the earn-out provision of the merger agreement,
we issued 65,657 shares of our common stock to the sole stockholder of
Objectware as contingent consideration payments.
The
securities issued as contingent consideration in our acquisition of Objectware
were issued to U.S. investors in reliance upon exemptions from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative to
sales by an issuer not involving any public offering, to the extent an exemption
from such registration was required.
Warrants
In the
fiscal year ended September 30, 2008, we issued 160,000 shares of our common
stock pursuant to the exercise of outstanding warrants.
The
shares of common stock issued upon exercise of such warrants were issued in
reliance upon exemptions from the registration provisions of the Securities Act
set forth in Section 4(2) thereof relative to sales by an issuer not involving
any public offering, to the extent an exemption from such registration was
required.
Options
In the
fiscal year ended September 30, 2008, we issued 6,667 shares of our common stock
pursuant to the exercise of vested stock options. In the fiscal year
ended September 30, 2008, we granted options to purchase equity shares on the
following dates and amounts:
|
Date
|
|
Number
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
October
26, 2007
|
|
|
336,000
|
|
|
$
|
3.69
|
|
|
January
2, 2008
|
|
|
6,800
|
|
|
$
|
3.22
|
|
|
April
18, 2008
|
|
|
110,500
|
|
|
$
|
2.50
|
|
|
July
1, 2008
|
|
|
42,000
|
|
|
$
|
2.40
|
|
|
July
25, 2008
|
|
|
15,000
|
|
|
$
|
2.20
|
|
|
August
19, 2008
|
|
|
313,000
|
|
|
$
|
1.76
|
|
The
securities were issued exclusively to our directors, executive officers,
employees and consultants. The issuance of options and the shares of common
stock issuable upon the exercise of such options as described above were issued
pursuant to written compensatory plans or arrangements with our employees,
directors and consultants, in reliance on the exemptions from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative to
sales by an issuer not involving any public offering, to the extent an exemption
from such registration was required.
Item
6. Management’s Discussion and Analysis or Plan of
Operation
This
section contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of factors and risks
including our limited operating history, our history of operating
losses, our ability to continue to grow sales, the acceptance of our products,
our ability to deliver services efficiently, growing competition, our ability to
find, make and efficiently integrate acquisitions, our ability to leverage our
existing cost structure as acquisitions are completed and our dependence on our
management team and key personnel. These and other risks are more
fully described herein and in our other filings with the Securities and Exchange
Commission.
This
section should be read in combination with the accompanying audited consolidated
financial statements and related notes prepared in accordance with United States
generally accepted accounting principles.
Overview:
Founded
in 2000, Bridgeline Software, Inc. (Bridgeline or the Company) is a developer of
web application management software and award-winning web applications that help
organizations optimize business processes. Our software and services
are designed to assist customers in maximizing revenue, improving customer
service and loyalty, enhancing employee knowledge, and reducing operational
costs by leveraging web based technologies.
Our
internally developed web application management software products (iAPPS® and
Orgitecture™) are SaaS (software as a service) solutions that unify Content
Management, Analytics, eCommerce, and eMarketing capabilities; enabling users to
enhance and optimize the value of their web properties. Combined with
award-winning web application development services, Bridgeline helps customers
cost-effectively accommodate the changing needs of today’s websites, intranets,
extranets, and mission-critical web applications.
We have a
team of Microsoft®-certified
developers that specialize in end-to-end web application development,
information architecture, usability engineering, SharePoint development, rich
media development, search engine optimization, and fully-managed application
hosting.
Our
marketing and selling efforts focus on medium-sized business and large business.
These businesses are typically in six vertical markets: Financial
services, life sciences, high technology, foundations, professional sports
management and transportation and storage. We have professional
direct sales management in eight geographic specific locations in the United
States. They are in the metropolitan Atlanta, Boston, Chicago,
Cleveland, Denver, Minneapolis, New York and Washington DC areas.
In fiscal
2008, approximately 61% of our customer base paid Bridgeline Software a monthly
subscription fee or a monthly managed service fee. In fiscal 2008
approximately 57% of our total revenue was from existing customers demonstrating
a deep customer traction model. The majority of our revenue in 2008
was driven from our application development services.
Bridgeline
Software plans to expand its distribution of iAPPS® and its
web application development services throughout North America. Due to
the high-touch nature of our sales process and delivery requirements, we believe
local staff is required in order to maximize market-share results.
We
believe the Web application development market in North America is growing and
is fragmented. We believe established yet small Web application development
companies have the ability to market, sell and install our iAPPS® web
application management software in their local metropolitan
markets. In addition, we believe these companies also have a customer
base and a niche presence in the local markets in which they operate. We believe
there is an opportunity for us to acquire multiple companies that specialize in
Web application development and are based in other large North American
cities. We believe that by acquiring certain of these geographic
specific companies and applying our business practices and efficiencies, we can
accelerate our time to market in areas other than those in which we currently
operate.
Our
expansion strategy led us to the recent acquisitions of Tenth Floor, Inc. (“Tenth Floor”) in
Cleveland and Minneapolis and Indigio Group, Inc. (“Indigo”) in
Denver. We now have a geographical presence in eight areas in the
United States and expect to make additional expansion acquisitions over the next
twenty-four months.
Fiscal
2008 marked yet another milestone for Bridgeline. We achieved record
revenues of $21.3 million for the year, a 91% increase over fiscal
2007. In addition, we achieved record earnings before interest,
taxes, depreciation and amortization (“EBITDA”) and before stock compensation
and impairment of goodwill and intangible assets of $1.2 million, an improvement
of $1.5 million or 525% over fiscal 2007. A reconciliation of net
Income to EBITDA for the fiscal year is included below under Results of
Operations. This improved performance came during a year in which we
completed two acquisitions and started the integration of each while our
existing business experienced growth in sales. A more detailed
discussion is contained below.
There are
a number of items that affect the comparison of fiscal 2008 to
2007. These items include:
|
·
|
We
completed the acquisition of Objectware, Inc. (“Objectware”) on July 5,
2007. The results for fiscal 2007 include approximately three
months of results from this
acquisition.
|
|
·
|
We
completed the acquisition of Purple Monkey Studios, Inc. (“Purple
Monkey”) on
August 31, 2007. The results for fiscal 2007 include one month
of results from this acquisition.
|
|
·
|
We
completed the acquisition of Tenth Floor on January 31,
2008. The results for fiscal 2008 include eight months of
results from this acquisition.
|
|
·
|
We
completed the acquisition of Indigio on July 1, 2008. The
results for fiscal 2008 include three month of results from this
acquisition.
|
|
·
|
We
increased our expenditures for research and development activities to
develop our iAPPS®
Analytics product during fiscal 2008 and enhanced our Content Management
and Framework products. We attained technical feasibility for
our iAPPS®
Analytics product in February 2008 and release version 2.1 of
Content Manager in September 2008.
|
|
·
|
As
a result of the annual review of the fair value of goodwill, we recorded a
non-cash impairment charge of $9.8 million at September 30,
2008.
|
We
regularly monitor a number of key metrics including revenue, gross profit
margins, and expenses as a percentage of revenue and EBITDA (as defined
above). We also monitor and evaluate bookings.
Results
of Operations
|
|
|
2008
|
|
|
2007
|
|
|
Change
$
|
|
|
Change
%
|
|
|
Total
revenue
|
|
$ |
21,295 |
|
|
$ |
11,151 |
|
|
$ |
10,144 |
|
|
|
91%
|
|
|
Gross
profit margin
|
|
|
10,990 |
|
|
|
6,131 |
|
|
|
4,859 |
|
|
|
79%
|
|
|
Loss
from operations
|
|
|
(10,333 |
) |
|
|
(1,006 |
) |
|
|
(9,327 |
) |
|
|
(927)%
|
|
|
Net
loss
|
|
$ |
(10,309 |
) |
|
$ |
(1,897 |
) |
|
$ |
(
8,412 |
) |
|
|
(443)%
|
|
|
EBITDA
|
|
$ |
1,255 |
|
|
$ |
(239 |
) |
|
$ |
1,494 |
|
|
|
525%
|
|
EBITDA
Reconciliation:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(10,309 |
) |
|
$ |
(1,897 |
) |
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
61 |
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
578 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
672 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
Stock
Compensation
|
|
|
425 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
Impairment
of goodwill and intangible assets
|
|
|
9,828 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
1,255 |
|
|
$ |
(239 |
) |
|
|
|
|
|
|
|
|
Revenue:
Overall,
revenue increased $10.1 million, or 91%, when compared to the same period one
year earlier. Acquisitions accounted for $3.4 million of this
increase. Excluding fiscal 2008 acquisitions, sales increased $6.8
million, or 67%. Approximately $3.8M of this increase was
attributable to incremental additional revenues in fiscal 2008 resulting from
the acquisitions of Objectware and Purple Monkey which included only three
months and one month of revenue, respectively in fiscal
2007. Over 50% of our revenue came from existing customers,
while the remainder came from new customers. A detailed discussion of
revenue is below.
Gross
Profit Margin:
Gross
profit margin increased $4.9 million or 79% as compared to the prior year,
although gross profit margin as a percentage of revenues declined to 52% from
55% in fiscal 2007. The increase in gross margin dollars is
principally the result of increases in revenues. The decrease in
gross margin percentage is principally the result of a revenue mix of lower
margin application development services and reduced billing rates inherited from
our Indigo acquisition. Our margins are impacted by several
factors. Our largest expense is our cost of direct
labor. To supplement full time staff, we utilize outside contractors
from time to time. In addition, our revenue is primarily from
services. As such, billable hours are an important factor that
impacts our gross profit margin. We use measures such as billable
utilization to monitor this factor. A discussion of gross margin by
revenue source follows.
Sources
of Revenue:
|
Revenue:
|
|
2008
|
|
|
2007
|
|
|
Change
$
|
|
|
Change
%
|
|
|
Application
development services
|
|
$ |
16,527 |
|
|
$ |
8,659 |
|
|
$ |
7,868 |
|
|
|
91%
|
|
|
Managed
services
|
|
|
3,683 |
|
|
|
2,050 |
|
|
|
1,633 |
|
|
|
80%
|
|
|
Perpetual
licenses and subscriptions
|
|
|
1,085 |
|
|
|
442 |
|
|
|
643 |
|
|
|
145%
|
|
|
Total
|
|
$ |
21,295 |
|
|
$ |
11,151 |
|
|
$ |
10,144 |
|
|
|
|
|
Application
Development Services:
Revenue
from application development services increased $7.9 million, a 91% improvement
from fiscal 2007. Acquisitions of Tenth Floor, Inc. and Indigio
Group, Inc. accounted for $2.0 million of the increase, and full year
incremental revenues generated from Objectware and Purple Monkey in fiscal 2008
accounting for approximately $2.6 million of the increase. Excluding
the affect of these acquisitions, revenue increased $3.3 million. Our
growth came in a number of industries and customers. First, revenue
from existing customers accounted for more than 65% of the fiscal 2008 revenues
from application development services. We achieved a record year in
sales, with sales from new customers of approximately $9.0 million in the
current year. Revenue from existing customers increased by
approximately $1.9 million when compared to the same period one year
earlier. Four existing customers recorded annual increases in excess
of $500 thousand each and $2.9 million in the aggregate offset by a decrease in
revenue from one customer of $2.0 million as a result of this customers’
changing needs. We continue to develop a diverse customer base with
only one customer, Depository Trust Clearing Corporation, representing 6.8% of
total revenues and no other customer representing greater than 5% of total
revenues. From an industry perspective, we have continued to see
broad penetration of our services into multiple industries. Our
strongest presence is in the high technology, financial services, non profit
industries and life sciences markets. Of the revenue growth from new
customers: high technology contributed $2.0 million; financial services
contributed $912 thousand; non profit contributed $818 thousand; and life
sciences contributed $376 thousand. The remaining growth came from
several other industries.
Managed
Services:
Revenue
from managed services increased $1.6 million, or 80% from the prior
year. Acquisitions accounted for $1.0 million of this
increase. Excluding acquisitions, managed services increased $633
thousand. The growth is a net result of increases in revenues from
over 330 existing customers offset principally by a decrease in revenues from
one customer. The average increase was approximately $4,800 per
customer offset by a reduction from one customer of approximately $800
thousand. The decrease from the one customer was largely due to the
customer’s needs changing. Bridgeline won several new
engagements during the year that combined with a full year of managed services
revenues resulting from recent acquisitions is expected to provide additional
benefits in fiscal 2009.
Perpetual
Licenses and Subscriptions:
Revenue
from licenses and subscriptions increased $643 thousand from the prior year, or
145%. This increase is largely attributable to $224 thousand in sales
of perpetual license products and an increase in subscription revenues of $406
thousand. The acquisition of Tenth Floor accounted for approximately
$329 thousand of the subscription revenue growth.
Gross
Profit
|
|
|
2008
|
|
|
2007
|
|
|
Change
$
|
|
|
Change
%
|
|
|
Application
development services
|
|
$ |
6,844 |
|
|
$ |
4,101 |
|
|
$ |
2,743 |
|
|
|
67%
|
|
|
Managed
services
|
|
|
3,212 |
|
|
|
1,614 |
|
|
|
1,598 |
|
|
|
99%
|
|
|
Perpetual
licenses and subscriptions
|
|
|
934 |
|
|
|
416 |
|
|
|
518 |
|
|
|
125%
|
|
|
Total
|
|
$ |
10,990 |
|
|
$ |
6,131 |
|
|
$ |
4,859 |
|
|
|
|
|
Application
Development Services:
Gross
profit from application development services increased by $2.7 million, or
67%. This represents a 41% gross profit margin in fiscal 2008, a
decrease of 6% from margins achieved in fiscal 2007 of 47%. This
increase in gross margin dollars is attributable largely to the increase in
sales. Our application development services are primarily driven by
salaries and wages and outside contractor costs. Application
development services revenue is driven by the number of billable hours on a
project. Thus, the increased revenue will generally correspond with a
similar increase in costs and margins. The decrease in gross profit
margin as a percentage of sales in fiscal 2008 is principally attributable to
three large engagements completed in fiscal 2008 that included implementation of
our new licensed products where our costs significantly exceeded our
estimates. Exclusive of these engagements, our gross margin
percentage derived from application development services remained consistent
with the prior year. We continue to seek margin improvements by
utilizing our library of software code to gain efficiencies on engagements where
the fee is fixed or when billable hours exceed our estimates without increasing
headcount. Margin improvements can also come from increased hourly
rates at a rate greater than the increase to costs. To encourage this
behavior, we use incentive plans that award those performing application
services when their billable hours exceed stated goals. Our workforce
is largely salaried and as such, increases in billable hours do not result in
significant increases to our cost basis. We believe that this and
other similar programs will help to improve margins in subsequent
years.
Managed
Services:
Gross
profit increased by $1.6 million, or 99%. This represents an 87%
gross profit margin for fiscal 2008, which is an increase of 8% from gross
profit margins attained in fiscal 2007 of 79%. The primary
costs associated with managed services revenues are principally the direct third
party costs of our co-managed network operation centers (NOCs). As a
result of the acquisition of Tenth Floor and Indigio, our total number of NOCs
increased from two to four as of September 30, 2008. The increase in
costs attributable to the additional NOCs was offset by increases in managed
services revenues derived from those locations thus resulting in our ability to
increase margins. Our current facilities have capacity and can be
expanded with our growth in revenue without adding substantial
costs. We are also evaluating the feasibility of consolidating one or
more of our NOC locations which may allow us to improve margins as we continue
to grow this revenue source. Our other costs for managed services
include wages for retained professional services. Margin improvements
in retained professional services are achieved when the amount of services is
below the estimated levels included in the “use it or lose it”
agreements.
Perpetual
Licenses and Subscriptions:
Gross
profits from perpetual licenses and subscriptions increased $518 thousand or
125% from the prior year. In fiscal 2008, gross profit margins were
86%, compared to 94% in fiscal 2007. Costs for the subscription
revenue include a share of the cost of our NOCs and the costs to maintain our
software products. During fiscal 2008, we added an additional product
line sold via subscription as a result of our acquisition of Tenth
Floor. However, we continued to shift our efforts from maintaining
the current and acquired on-demand software products sold through subscriptions
and began selling our new product, iAPPS. Costs associated with maintaining the
legacy products and costs incurred from operating additional NOC locations
resulted in a lower gross profit margin on licensing and subscription revenues
in fiscal 2008 compared to the previous year. We plan to begin
migrating customers to our new product platform from our legacy products over
the next eighteen months which may reduce the cost of maintaining those products
and result in increased margins. In addition, we are evaluating the
feasibility of consolidating multiple NOCs, thus reducing the cost of hosting
for the subscription revenues.
Loss
from Operations
Included
in the loss from operations are costs for sales and marketing, general and
administrative expenses, research and development expenses, depreciation
and amortization and impairment of goodwill and intangible
assets. Overall, loss from operations before impairment decreased
$501 thousand, a 99% improvement. This reduction in loss from
operations before impairment is principally a result of an increase in gross
profits generated from increased sales in fiscal 2008 compared to fiscal
2007. Sales and marketing expenses remained relatively unchanged as a
percentage of sales at 30% in fiscal 2008 versus 31% in fiscal 2007, but general
and administrative expenses as a percentage of sales decreased to 17% in fiscal
2008 compared to 22% in fiscal 2007 as we were able to leverage our existing
infrastructure in information technology and finance while supporting the growth
in revenue. Depreciation and amortization expense increased to 5% of
sales in fiscal 2008 compared to 3% in the prior year primarily resulting from
increases in purchases of capital equipment to support our growth and additional
fixed assets acquired in the acquisitions of Tenth Floor and
Indigio. Research and development expenses decreased to 3% of sales
in fiscal 2008 compared to 7% in fiscal 2007 principally the result of the
capitalization of approximately $397 thousand of software development costs in
accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed (“SFAS 86”). A brief
discussion of each component follows.
Sales and
Marketing Expenses
Sales and
marketing expenses increased $2.8 million, or 80%, when compared to fiscal
2007. We look at sales and marketing as a percentage of
sales. For fiscal 2008, sales and marketing represented 30% of sales,
compared to 31% in fiscal 2007. The improvement as a percentage of
sales is largely due to our ability to leverage our existing infrastructure as
sales increase. We have established a number of incentives and goals
for each salesperson to encourage this behavior. We believe that the
increased sales volume and our current sales run rate will allow this percentage
to continue to decrease into fiscal 2009. On an absolute dollars basis, the
increase is sales and marketing expenses is largely due to increased marketing
expenses and increased sales force headcount in fiscal 2008. During
fiscal 2008, we sponsored a number of seminars adding to the marketing expenses
when compared to fiscal 2007. The remaining increase in marketing
expenses is due to the increase in headcount in marketing. Other
sales expenses increased as a result of the increased sales, such as
commissions.
General
and Administrative Expenses
General
and administrative expenses increased $1.0 million, or 42%, when compared to the
same period in fiscal 2007. This increase is due to several
factors. In fiscal 2008, we incurred additional travel, legal,
accounting, consulting and professional fees associated with operating as a
public company, which represented approximately $291 thousand of the
increase. In addition, our payroll expenses increased due to salary
increases and additional headcount at our corporate offices. We hired
additional personnel during fiscal 2008 primarily in our accounting function
when compared to fiscal 2007. As of September 30, 2008, we believe
that there are limited needs to hire additional personnel in corporate and that
the infrastructure can absorb additional acquisitions without additional
administrative personnel. Total payroll and benefits increased in
fiscal 2008 by $543 thousand from fiscal 2007.
Research
and Development:
Expenses
for research and development decreased $172 thousand in fiscal 2008 compared to
the prior year net of capitalization of software development costs of
approximately $397 thousand. Inclusive of the capitalized costs,
research and development spending in fiscal 2008 totaled $1.0 million compared
to $791 thousand in fiscal 2007, an increase of $225 thousand or
28%. The increase in total spending during fiscal 2008 was incurred
to develop our new on-demand software products, iAPPS Framework, iAPPS Content
Manager and iAPPS Analytics. The majority of our spending is in our
India location. We believe that the quality of the developers,
coupled with the cost factors, has allowed us to spend considerably less than if
this product has been developed solely in the U.S. We plan to
continue investing in research and development as we develop new eCommerce and
eMarketing products on our iAPPS platform over the next twenty-four months along
with additional releases and enhancements to our current iAPPS product
offerings.
Depreciation
and Amortization
The
increase in depreciation and amortization of $682 thousand during fiscal 2008, a
185% increase, is largely attributable to the additional depreciation and
amortization expense associated with acquisitions. In July and August
of 2007, we made two acquisitions. The current year includes a full
year of depreciation and amortization associated with the assets acquired as
compared to three and one months, respectively in fiscal 2007 resulting in an
increase of $292 thousand. During the current year, we made two
acquisitions and began depreciating and amortizing the acquired
assets. This resulted in an increase of $207 thousand to amortization
and depreciation expense when compared to fiscal 2007. In addition,
during fiscal 2008 we invested in equipment for our NOCs. The
remaining increase is attributable the timing of fixed asset
expenditures.
Impairment
of Definite-Lived Intangible Assets and Goodwill
Under
SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill
and certain intangible assets are deemed to have indefinite lives and are no
longer amortized, but are reviewed at least annually for impairment. In the
fourth quarter of fiscal 2008, we completed our annual impairment test and as a
result of the present environment impacting our business and results and an
overall decline in organic revenue growth in the second half of fiscal 2008,
combined with a material decline of our stock price since September 30, 2007, we
determined that it had identified an impairment triggering event. Therefore, we
engaged an independent third party to assist us in the review of the carrying
value of our goodwill and definite-lived intangible asset balances for possible
impairment in accordance with the provisions of SFAS No. 142. We
evaluated the results of fair value derived utilizing four standard valuation
techniques: discounted cash flow (Income Approach); guideline public
companies method (Market Approach); direct market data approach (“DMD”) for
mergers and acquisitions (Market Approach); and direct market data approach for
public market capitalization (Market Approach). These methods
considered valuation inputs from all three levels of valuation (Level 1, Level 2
and Level 3) described in SFAS No. 157, “Fair Value Measurements” (“SFAS No.
157”). In accordance with the provisions of SFAS No. 142 and SFAS No. 157
we placed significant weighting in our evaluation of fair value derived using
the Direct Market Data Method as this result utilized the Level 1 input - our
quoted stock price in an active market, and was afforded the highest
consideration. Accordingly, the fair values derived under the other
three methods utilizing Level 2 and Level 3 inputs were allocated significantly
less weighting. The review
for
impairment indicated that the carrying value goodwill was impaired as of
September 30, 2008. Based upon the results of the valuation
techniques utilized, we recognized an impairment charge of $9.8 million for the
fiscal year ended September 30, 2008.
For the
definite-lived intangible asset impairment review, we compared the carrying
value of the intangible assets against the estimated undiscounted cash flows to
be generated over the remaining life of the intangible assets. Based upon the
results, we recognized an impairment charge of $76 thousand related to certain
customer relationships, non-compete agreements and trade
names.
For the
goodwill impairment evaluation, we are required to perform a second step of the
goodwill impairment test, used to measure the amount of impairment loss that
compares the implied fair value of our one reporting unit goodwill with the
carrying amount of that goodwill. We expect to complete this analysis
in our first quarter of fiscal 2009.
Liquidity
and Capital Resources
We have
historically funded our operations principally through issuances of equity and
short-term debt. We believe that our operations will generate
positive cash flows as our revenues increase. During fiscal 2008, our operations
used $387 thousand in cash, compared to $1.0 million in fiscal
2007. The reduction in cash used in operations is primarily
attributable to our reduction in net losses before impairment charges in fiscal
2008 when compared to fiscal 2007. During 2008, we completed two
acquisitions for a cash use of $1.8 million. In September 2008, we
received cash proceeds of $1.0 million from our bank line of credit, which we
repaid in full in October 2008. In
December 2008, the bank line of credit was amended, increasing the available
credit up to the lesser of (a) $3.0 million and (b) 80% of
eligible accounts receivable, subject to specified adjustments. We
also used cash to fund capital expenditures of $980 thousand and contingent
acquisition payments of $528 thousand, and expended $397 thousand in software
development costs that were capitalized in accordance with SFAS No. 86. As
of September 30 2008, we have $1.9 million in cash available for
operations.
As of
September 30, 2008, as part of acquisitions completed, we have remaining
contingent acquisition obligations to the prior entities’ shareholders which are
to be paid in cash up to a maximum of $2.1 million, $1.9 million, $793 thousand
and $330 thousand for the fiscal years ending September 30, 2009, 2010, 2011 and
2012, respectively, provided that the contingent results are
achieved. The contingent acquisition obligations are based
primarily on the achievement sales targets and positive EBITDA, as defined in
the acquisition agreements.
Cash
Flows
Working
Capital
At
September 30, 2008, we had working capital of $2.2 million. We
define working capital as current assets less current liabilities. We
had receivables of $4.0 million. This compares to $2.9 million in
receivables at September 30, 2007. The level of trade receivables at
September 30, 2008 and September 30, 2007 represented approximately 48 and
64 days of revenues, respectively. Our receivables can vary dramatically due to
overall sales volumes, the timing of implementation of services, receipts from
large customers, and other contract payments. Unbilled receivables at September
30, 2008 increased $1.2 million from September 30, 2007 principally due to
increases in revenues and the timing of billing in accordance with stated
contract terms and acquisitions during the year.
Investing
Activities
Net cash
used in investing activities was $3.7 million in fiscal 2008, compared to $5.1
million in fiscal 2007. In fiscal 2008, we used $1.8 million in cash
for the acquisitions of Tenth Floor and Indigio. We also spent $980
thousand in capital expenditures and
expended $397 thousand in software development costs that were capitalized in
accordance with SFAS No. 86. During fiscal 2008, we continued to
invest in our network operation centers to support the existing software as a
service business and to position the network operation centers for future growth
with the introduction of iAPPS. The remaining cash was expended on
contingent acquisition obligations, totaling $528 thousand.
Financing
Activities
Net cash
provided by financing activities was $800 thousand for fiscal 2008, compared to
$10.7 million in fiscal 2007. As noted above, the Company received
proceeds from the bank line of credit of $1.0 million and repaid obligations
under capital equipment leases of $202 during fiscal 2008. The cash flows from
financing activities in fiscal 2007 were principally attributable to the net
proceeds received from our initial public offering.
Capital
Resources and Liquidity Outlook
We
believe that our operations will generate positive cash flows sufficient to
cover any requirements for capital expenditures during fiscal
2009. We believe that cash requirements for capital expenditures will
be approximately $600
thousand
during fiscal 2009. We believe operating cash flows will be used to
fund these expenditures. Funds required for acquisitions, if any, and
investments in research and development will be funded from the remaining cash
flows from operations and our bank line of credit.
Inflation
We
believe that the relatively moderate rates of inflation in recent years have not
had a significant impact on our operations. Inflationary increases
can cause pressure on wages and the cost of benefits offered to
employees. We believe that these increases to date have not had a
significant impact on our operations.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements, financings or other relationships with
unconsolidated entities or other persons other than our operating leases and
contingent acquisition payments disclosed below.
We
currently do not have any variable interest entities. We do not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. We are,
therefore, not materially exposed to any financing, liquidity, market or credit
risk that could arise if we had engaged in such relationships.
Contractual
Obligations
The
following summarizes our long-term contractual obligations as of
September 30, 2008:
(in
thousands)
|
|
|
FY
09
|
|
|
FY
10
|
|
|
FY
11
|
|
|
FY
12
|
|
|
FY
13
|
|
|
FY
14
|
|
|
Totals
|
|
|
Payment
Obligations by Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
line of credit
|
|
$ |
1,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$
|
— |
|
|
$ |
1,000 |
|
|
Operating
leases (A)
|
|
|
1,238 |
|
|
|
1,114 |
|
|
|
998 |
|
|
|
640 |
|
|
|
334 |
|
|
|
211 |
|
|
|
4,535 |
|
|
Capital
lease obligations
|
|
|
130 |
|
|
|
90 |
|
|
|
55 |
|
|
|
12 |
|
|
|
— |
|
|
|
— |
|
|
|
287 |
|
|
Contingent
acquisition payments (B)
|
|
|
2,054 |
|
|
|
1,932 |
|
|
|
793 |
|
|
|
330 |
|
|
|
— |
|
|
|
— |
|
|
|
5,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,422 |
|
|
$ |
3,136 |
|
|
$ |
1,846 |
|
|
$ |
982 |
|
|
$ |
334 |
|
|
$
|
211 |
|
|
$ |
10,931 |
|
|
(A)
|
Net
of sublease income
|
|
(B)
|
The
contingent acquisition payments are maximum potential earn-out
consideration payable to the former owners of the acquired
companies. Amounts actually paid may be
less.
|
Critical
Accounting Policies
The
Company’s significant accounting policies are described in Note 2 of the
Consolidated Financial Statements, that were prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”). The preparation of financial statements in accordance US GAAP requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses in the reporting period. We regularly make
estimates and assumptions that affect the reported amounts of assets and
liabilities. The most significant estimates include our valuation
of accounts receivable and long-term assets, including intangibles and
deferred tax assets, amounts of revenue to be recognized on service
contracts in progress, unbilled receivables, and deferred revenue. We base our
estimates and assumptions on current facts, historical experience and
various other factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the accrual of costs and expenses that
are not readily apparent from other sources. The actual results experienced
by us may differ materially and adversely from our estimates. To the extent
there are material differences between our estimates and the actual results, our
future results of operations will be affected.
We
consider the following accounting policies to be both those most important to
the portrayal of our financial condition and those that require the most
subjective judgment:
|
·
|
Allowance
for doubtful accounts;
|
| · |
Accounting
for Cost of Computer Systems to be Sold, Leased or Otherwise
Marketed;
|
|
·
|
Accounting
for goodwill and other intangible assets;
and
|
|
·
|
Accounting
for stock-based compensation.
|
Accounting for Cost of Computer
Systems to be Sold, Leased or Otherwise Marketed. We charge
research and development expenditures for technology development to operations
as incurred. However, in accordance with SFAS No. 86, we capitalize
certain software development costs subsequent to the establishment of
technological feasibility. Once the product is available for general
release, the capitalized costs are amortized in cost of sales. Based
on our product development process, technological feasibility is established
upon completion of a working model. Certain costs incurred between completion of
a working model and the point at which the product is ready for general release
are capitalized if significant.
Revenue Recognition.
Substantially all of our revenue is generated from three activities:
Application Development Services, Managed Services, and Perpetual Licenses and
Subscriptions. We recognize revenue in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition in Financial
Statements (“SAB 104”), Emerging Issues Task Force Issue No. 00-21, Accounting For Revenue Arrangements
with Multiple Deliverables (“EITF 00-21”), and American Institute of
Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition
(“SOP 97-2”) and related interpretations. Revenue is recognized when all
of the following conditions are satisfied: (1) there is persuasive evidence of
an arrangement; (2) delivery has occurred or the services have been provided to
the customer; (3) the amount of fees to be paid by the customer is fixed or
determinable; and (4) the collection of the fees is reasonably assured. Billings
made or payments received in advance of providing services are deferred until
the period these services are provided.
Application
Development Services
Application
development services include professional services primarily related to the
Company’s Web development solutions that address specific customer needs such as
information architecture and usability engineering, interface configuration,
application development, rich media, e-Commerce, e-Learning and e-Training,
search engine optimization, and content management. Application development
services engagements often include a hosting arrangement that provides for the
use of certain hardware and infrastructure, generally at one of our network
operating centers. As described further below, revenue for these
hosting arrangements is included in managed services. Application development
services engagements that include hosting arrangements are accounted for as
multiple element arrangements as described below under “Multiple-Element
Arrangements.”
For
application development services engagements sold on a stand alone basis,
revenue is recognized in accordance with SAB 104. Application
development services are contracted for on either a fixed price or time and
materials basis. For its fixed price engagements, we apply the
proportional performance model to recognize revenue based on cost incurred in
relation to total estimated cost at completion. We have determined that labor
costs are the most appropriate measure to allocate revenue among reporting
periods, as they are the primary input when providing application development
services. Customers are invoiced monthly or upon the completion of milestones.
For milestone based projects, since milestone pricing is based on expected
hourly costs and the duration of such engagements is relatively short, this
input approach principally mirrors an output approach under the proportional
performance model for revenue recognition on such fixed priced
engagements. For time and materials contracts, revenues are
recognized as the services are provided.
Application
development services are often sold as part of multiple element arrangements
wherein perpetual licenses for our software products, retained professional
services, hosting and/or subscriptions are provided in connection with
application development services engagements. Our revenue recognition
policy with respect to these multiple element arrangements is described further
below under the caption “Multiple Element Arrangements.”
Managed
Services
Managed
services primarily include on-going retained professional services, hosting
services, and post contract customer support services (“PCS”).
Retained
professional services are either contracted for on an “on call” basis or for a
certain amount of hours each month. Such arrangements generally provide for a
guaranteed availability of a number of professional services hours each month on
a “use it or lose it” basis. For retained professional services
sold on a stand-alone basis, revenue is recognized in accordance with SAB
104. We recognize revenue as the services are delivered or over the
term of the contractual retainer period. These arrangements do not
require formal customer acceptance and do not grant any future right to labor
hours contracted for but not used.
Hosting
arrangements provide for the use of certain hardware and infrastructure,
generally at one of our network operating centers. The majority of
the customers under contractual hosting arrangements have been previous
application development services customers. Set-up costs associated with hosting
arrangements are not significant and when charged are recognized ratably over
the expected period of performance, generally twenty-four
months. Hosting agreements are typically month-to-month arrangements
that provide for termination for convenience by either party generally upon
30-days notice. Revenue is recognized monthly as the hosting services
are delivered. As described below, hosting revenues associated
with our subscriptions are included in perpetual licenses and subscriptions
revenue.
Retained
professional services are sold on a stand-alone basis or in multiple
element arrangements with application development services and, occasionally,
subscriptions. Hosting services are typically sold in connection with
application development services but also may be sold on a stand-alone
basis. Our revenue recognition policy with respect to multiple
element arrangements is described further below under the caption “Multiple
Element Arrangements.”
PCS
includes a provision for unspecified product upgrades, error or bug fixes, and
telephone and online support during our normal business
hours. Revenue for PCS sold separately is recognized ratably on a
straight-line basis over the period of performance, typically twelve
months. Vendor specific objective evidence of fair value (“VSOE”) is
established for PCS and is based on the price of PCS when sold separately, which
has been established via annual renewal rates and is a consistent percentage of
the stipulated software license fee. Revenue recognition for PCS sold
as part of a multiple element arrangement is described further below under the
caption “Multiple Element Arrangements.”
Perpetual
Licenses and Subscriptions
We
license our software on a perpetual and subscription basis. Customers who
license the software on a perpetual basis receive rights to use the software for
an indefinite time period. For arrangements that consist of a
perpetual license and PCS, the PCS revenue is recognized ratably on a
straight-line basis over the period of performance and the perpetual license is
recognized on a residual basis in accordance with AICPA SOP
No. 98-9, Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. Under the residual method, the fair value of
the undelivered elements are deferred and the remaining portion of the
arrangement fee is allocated to the delivered elements and recognized as
revenue, assuming all other revenue recognition criteria have been
met. Revenue recognition for perpetual licenses sold as part of a
multiple element arrangement is described further below under the caption
“Multiple Element Arrangements.”
Customers
also license our software on a subscription basis, which can be described as
“Software as a Service” or “SaaS”. SaaS is a model of software
deployment where an application is hosted as a service provided to customers
across the Internet. Subscription agreements include access to the
Company’s software application via an internet connection, the related hosting
of the application, and PCS. Customers receive automatic updates and
upgrades, and new releases of the products as soon as they become
available. Subscription agreements are generally month-to-month
arrangements that provide for termination for convenience by either party upon
30 to 45 days notice. Revenue is recognized monthly as the services
are delivered. Any up front set-up fees are amortized over 24
months. We have concluded that our Subscription Agreements are
outside the scope of SOP 97-2 since the software is only accessible through a
hosting arrangement with us and the customer cannot take possession of the
software. Revenue recognition for Subscriptions sold as part of a
multiple element arrangement is described further below under the caption
“Multiple Element Arrangements.”
Multiple
Element Arrangements
As
described above, application development services are often sold as part of
multiple element arrangements. Such arrangements may include delivery
of a perpetual license for our software products at the commencement of an
application development services engagement or delivery of retained professional
services, hosting services and/or subscriptions subsequent to completion of such
engagement, or combinations thereof. In
accounting
for these multiple element arrangements, we follow SOP 97-2 or EITF 00-21,
as applicable. As described further below, we have concluded that each element
can be treated as a separate unit of accounting when following EITF
00-21.
When we
license our software on a perpetual basis in a multiple element arrangement that
also includes application development services and PCS, VSOE of each element is
considered. VSOE is established for PCS and is based on the price of
PCS when sold separately, which has been established via annual renewal
rates. Revenue recognition for perpetual licenses sold with
application development services are considered on a case by case
basis. We have not established VSOE for perpetual licenses or fixed
priced application development services and therefore in accordance with SOP
97-2, when perpetual licenses are sold in a multiple element arrangement
including application development services where VSOE for the services has not
been established, the license revenue is deferred and recognized under the
proportional performance model along with the associated application development
services. For the fiscal year ended September 30, 2008 we have
recognized revenues of $224 thousand for perpetual licenses. In
determining VSOE for the application development services element, the
separability of the application development services from the software license
and the value of the services when sold on a standalone basis is
considered. We also consider the categorization of the services, the
timing of when the services contract was signed in relation to the signing of
the perpetual license contract and delivery of the software, and whether the
services can be performed by others. We have concluded that its
application development services are not required for the customer to use the
product but, rather enhance the benefits that the software can bring to the
customer. In addition, the services provided do not result in
significant customization or modification of the software and are not essential
to its functionality, and can also
be performed by the customer or a third party. If an application
development services arrangement does qualify for separate accounting, we
recognize the perpetual license on a residual basis. If an
application development services arrangement does not qualify for separate
accounting, we recognize the perpetual license under the proportional
performance model as described above.
When
subscription arrangements are sold with application development services, we
follow EITF 00-21 and have concluded that each element can be treated as a
separate unit of accounting. In determining separability, the timing
of the commencement of the subscription period to the services delivery is
considered. If the subscription period begins after the services
delivery then we generally recognize the services as delivered and then
commences revenue recognition for the subscription after the services have been
delivered. To date, all subscription periods have commenced after the
services delivery. If the application development services
arrangement does not qualify for separate accounting, the application
development services revenues and related costs are deferred and recognized over
the subscription period. Subscriptions also include a PCS component,
and we have determined that the two elements cannot be separated and must be
recognized as one unit over the applicable service period.
Customer Payment
Terms
Our
payment terms with customers typically are “due upon receipt” or “net 30 days
from invoice”. Payments terms may vary by customer but in generally do not
exceed 45 days from invoice date. For Application Development Services,
we typically invoice project deposits of between 20% and 33% of the total
contract value which we record as deferred revenue until such time the
related services are completed. Subsequent invoicing for Application Development
Services is either monthly or upon achievement of milestones and
payment terms for such billings are within the standard terms described above.
Invoicing for subscriptions and hosting are typically issued monthly and
are generally due upon invoice receipt. Our agreements with customers do not
provide for any refunds for services or products and therefore no specific
reserve for such is maintained. In the infrequent instances where customers
raise concerns over delivered products or services, we have endeavored to remedy
the concern and all costs related to such matters have been insignificant
in all periods presented.
Warranty
Certain
arrangements include a warranty period generally between 30 to 90 days from the
completion of work. In hosting arrangements, we may provide warranties of
up-time reliability. We continue to monitor the conditions that are subject to
the warranties to identify if a warranty claim may arise. If we determine
that a warranty claim is probable, then any related cost to satisfy the
warranty obligation is estimated and accrued. Warranty claims to date have been
immaterial.
Reimbursable
Expenses
In
connection with certain arrangements, reimbursable expenses are incurred and
billed to customers and such amounts are recognized as both revenue and
cost of revenue.
Accounting
for Goodwill and Other Intangible Assets.
Goodwill
and other intangible assets require us to make estimates and judgments about the
value and recoverability of those assets. We have made several acquisitions
of businesses that resulted in both goodwill and intangible assets being
recorded in our financial statements.
Goodwill
is recorded as the difference, if any, between the aggregate consideration paid
for an acquisition and the fair value of the net tangible and intangible
assets acquired. The amounts and useful lives assigned to other intangible
assets impact the amount and timing of future amortization, and the amount
assigned to in-process research and development is expensed immediately.
The value of our intangible assets, including goodwill, could be impacted by
future adverse changes such as: (i) any future declines in our
operating results, (ii) a decline in the value of technology company
stocks, including the value of our common stock, (iii) any failure to
meet the performance projections included in our forecasts of future operating
results. We evaluate goodwill and other intangible assets deemed to have
indefinite lives on an annual basis in the quarter ended September 30 or
more frequently if we believe indicators of impairment exist. Application of the
goodwill impairment test requires judgment including the identification of
reporting units, assigning assets and liabilities to reporting units, assigning
goodwill to reporting units and determining the fair value of each
reporting unit. In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”),
management has determined that there was only one reporting unit to be tested.
The goodwill impairment test compares the implied fair value of the
reporting unit with the carrying value of the reporting unit. The
implied fair value of goodwill is determined in the same manner as in a
business combination. Determining the fair value of the implied goodwill is
judgmental in nature and often involves the use of significant estimates and
assumptions. These estimates and assumptions could have a significant
impact on whether or not an impairment charge is recognized and also the
magnitude of any such charge. Estimates of fair value are primarily
determined using discounted cash flows and market comparisons.
These approaches use significant estimates and assumptions, including
projection and timing of future cash flows, discount rates reflecting the
risk inherent in future cash flows, perpetual growth rates, determination of
appropriate market comparables, and determination of whether a premium or
discount should be applied to comparables. It is reasonably possible that the
plans and estimates used to value these assets may be incorrect. If our
actual results, or the plans and estimates used in future
impairment analyses, are lower than the original estimates used to assess
the recoverability of these assets, we could incur additional impairment
charges.
We also
assess the impairment of our long-lived assets, including definite-lived
intangible assets and equipment and improvements when events or changes in
circumstances indicate that an asset’s carrying value may not be recoverable.
An impairment charge is recognized when the sum of the expected future
undiscounted net cash flows is less than the carrying value of the asset.
Any impairment charge would be measured by comparing the amount by which the
carrying value exceeds the fair value of the asset being evaluated for
impairment. Any resulting impairment charge could have an adverse impact on our
results of operations.
In the
fourth quarter of fiscal 2008, we completed our annual impairment test and as a
result of the present economic environment impacting our business and
results, an overall decline in organic revenue growth in the fourth quarter
of fiscal 2008, and a material decline of the trading price of our common
stock since June 30, 2008, we determined that we had identified an impairment
triggering event. Therefore, we engaged an independent third party to assist us
in the review of the carrying value of goodwill and our definite-lived
intangible asset balances for possible impairment in accordance with the
provisions of SFAS No. 142 and SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets” (“SFAS No. 144”), respectively.
In our
review of the carrying value of the goodwill and intangible assets we determined
the fair value of our single reporting unit using the Income Approach, or more
specifically the Discounted Cash Flow Method, the Market Approach, utilizing
both the Guideline Company Method and the Comparable Transaction Method, and the
Direct Market Data Method, determining the fair value based on active market
data at September 30, 2008. The review for impairment indicated that
the carrying value of both the goodwill and intangible assets was impaired as of
September 30, 2008). In accordance with SFAS No. 157, our evaluation
considered inputs from all three levels of hierarchy (Level 1, Level 2 and Level
3). In accordance with the provisions of SFAS No. 142 and SFAS No.
157 we placed significant weighting in our evaluation of fair value derived
using the Direct Market Data Method (i.e. market capitalization) as it involves
the use of a Level 1 input – the value of our stock in an active market, and
therefore is afforded the highest consideration. Accordingly, the
fair values derived utilizing the other three methods based on Level 2 and Level
3 inputs were allocated significantly less weighting. We also
considered the impact of the current economic recession on our fourth quarter
revenues and the 52% decline in our stock price since June 30,
2008. Based upon the results of the valuation techniques utilized, we
recognized an impairment charge of $9.8 million for the fiscal year ended
September 30, 2008 related to carrying value of goodwill.
As a
final requirement to the goodwill impairment evaluation, the amount of
impairment is to be allocated to the assets and liabilities of the applicable
business units acquired based on implied fair value of each acquired unit’s
assets with the carrying amount of those assets, including
goodwill. We expect to complete this analysis in its first fiscal
quarter of 2009.
Stock-Based
Compensation
At
September 30, 2008, we maintained two stock-based compensation plans which are
more fully described in Note 9.
Effective
October 1, 2006, the Company adopted the recognition and measurement provisions
of Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS
123(R)”), Share-Based Payment, which replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No.
25 (“APB 25”), Accounting for Stock Issued to Employees, and related
interpretations. SFAS 123(R) requires that share-based payments (to
the extent they are compensatory) be recognized in our consolidated statements
of operations based on their fair values. In addition, we have applied the
provisions of the SEC’s Staff Accounting Bulletin No.107 in our accounting
for Statement 123R. In adopting SFAS 123(R), the Company applied the
modified prospective approach to transition. Under the modified
prospective approach, the provisions of SFAS 123(R) are to be applied to new
awards and to awards modified, repurchased, or cancelled after the required
effective date. Additionally, compensation cost for the portion of awards for
which the requisite service has not been rendered that are outstanding as of the
required effective date shall be recognized as the requisite service is rendered
on or after the required effective date.
As
required by SFAS 123(R), we recognize stock-based compensation expense for
share-based payments issued or assumed after October 1, 2006 that are expected
to vest. For all share-based payments granted or assumed beginning October
1, 2006, we recognize stock-based compensation expense on a straight-line basis
over the service period of the award, which is generally four
years. Upon adoption of SFAS 123 (R), we are required to recognize
the fair value of the unvested portion of share-based payments granted prior to
October 1, 2006 over the remaining service period, net of estimated
forfeitures. In determining whether an award is expected to vest, we use
an estimated, forward-looking forfeiture rate based upon our historical
forfeiture rates. Stock-based compensation expense recorded using an
estimated forfeiture rate is updated for actual forfeitures quarterly. We
also consider, each quarter, whether there have been any significant changes in
facts and circumstances that would affect our forfeiture rate. We are
required to estimate the stock awards that we ultimately expect to vest and to
reduce stock-based compensation expense for the effects of estimated forfeitures
of awards over the expense recognition period. Although we estimate
forfeitures based on historical experience, actual forfeitures in the future may
differ. In addition, to the extent our actual forfeitures are different
than our estimates, we record a true-up for the difference in the period that
the awards vest, and such true-ups could materially affect our operating
results.
We
estimate the fair value of employee stock options using the
Black-Scholes-Merton option valuation model (the “Model”). The fair
value of an award is affected by our stock price on the date of grant as well as
other assumptions including the estimated volatility of our stock price over the
term of the awards and the estimated period of time that we expect employees to
hold their stock options. The risk-free interest rate assumption we use is
based upon United States treasury interest rates appropriate for the expected
life of the awards. We use the historical volatility of our publicly
traded options in order to estimate future stock price trends. In order to
determine the estimated period of time that we expect employees to hold their
stock options, we have used historical rates of employee turnover by job
classification. Our expected dividend rate is zero since we do not
currently pay cash dividends on our common stock and do not anticipate doing so
in the foreseeable future. The aforementioned inputs entered into the option
valuation model we use to fair value our stock awards are subjective estimates
and changes to these estimates will cause the fair value of our stock awards and
related stock-based compensation expense we record to vary.
Prior to
the Company’s initial public offering in June 2007, the fair value of the
Company’s common stock was generally determined using the weighted average of
three customary valuation techniques: the discounted cash flow method, the
market approach, and the guideline public company method. The Company
believes that a weighted average of these three techniques is the most
reasonable approach to the valuation of our stock for this
period. The Company believed that a value market multiple of
comparable public companies based on market value of invested capital to
revenues provides an objective basis for measuring its fair market
value. Accordingly, the Company placed the highest weighting on this
factor in its analysis.
We record
deferred tax assets for stock-based awards that result in deductions on our
income tax returns, based on the amount of stock-based compensation recognized
and the statutory tax rate in the jurisdiction in which we will receive a tax
deduction. Because the deferred tax assets we record are based upon the
stock-based compensation expenses in a particular jurisdiction, the
aforementioned inputs that affect the fair value of our stock awards also
indirectly affect our income tax expense. In addition, differences between
the deferred tax assets recognized for financial reporting purposes and the
actual tax deduction reported on our income tax returns are recorded in
additional paid-in capital. If the tax deduction is less than the deferred tax
asset, such shortfalls reduce our pool of excess tax benefits. If the pool
of excess tax benefits is reduced to zero, then subsequent shortfalls would
increase our income tax expense. Our pool of excess tax benefits is
computed in accordance with the alternative transition method as prescribed
under FASB Staff Position FAS 123R-3, Transition Election to Accounting for
the Tax Effects of Share-Based Payment Awards.
To the
extent we change the terms of our employee stock-based compensation programs or
refine different assumptions in future periods such as forfeiture rates that
differ from our estimates, the stock-based compensation expense that we record
in future periods and the tax benefits that we realize may differ significantly
from what we have recorded in previous reporting periods.
In
October 2008, the Board of Directors approved the modification of incentive
option grants totaling approximately 1.6 million shares. The effect
of the modification was to adjust the exercise price of the applicable options
to the fair value of the underlying common stock on the date of
modification. In addition, the vesting period on the applicable
options was reset to the standard three year term set forth in our incentive
stock option plan. We estimated the fair value of the stock option
modifications using the Model and will record additional stock-based
compensation of approximately $181 thousand over the three year vesting
period.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS
141R”), which replaces FASB Statement No. 141 (“SFAS 141”), Business
Combinations. This Statement retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS 141R defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as the date that the acquirer achieves
control. SFAS 141R will require an entity to record separately from
the business combination the direct costs, where previously these costs were
included in the total allocated cost of the acquisition. SFAS 141R
will require an entity to recognize the assets acquired, liabilities assumed,
and any non-controlling interest in the acquired entity at the acquisition date,
at their fair values as of that date. This compares to the cost
allocation method previously required by SFAS No. 141. SFAS 141R will
require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met. Finally, SFAS 141R will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date. This Statement will be effective for business
combinations completed in or after the first annual reporting period beginning
on or after December 15, 2008. Early adoption of this standard is not
permitted and the standards are to be applied prospectively
only. Upon adoption of this standard, there will be no impact to the
Company’s results of operations and financial condition for acquisitions
previously completed. The adoption of this standard will impact any
acquisitions completed by the Company in our fiscal 2010.
In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”), an amendment of Accounting
Research Bulletin No. 51. The standard changes the accounting for
noncontrolling (minority) interests in consolidated financial statements
including the requirements to classify noncontrolling interests as a component
of consolidated stockholders’ equity, and the elimination of “minority interest”
accounting in results of operations with earnings attributable to noncontrolling
interests reported as a part of consolidated earnings. Additionally, SFAS 160
revises the accounting for both increases and decreases in a parent’s
controlling ownership interest. SFAS 160 is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited. We are
currently evaluating the impact of the pending adoption of SFAS 160 on our
consolidated financial statements.
In March
2008, the FASB issued Statement No.161 (“SFAS 161”), Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133. SFAS 161 requires disclosure of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for and how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS
161 is effective for fiscal years beginning after November 15, 2008, with
early adoption permitted. We are currently evaluating the impact of the
pending adoption of SFAS 161 on our consolidated financial
statements.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No.142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective
for fiscal years beginning after December 15, 2008 and early adoption is
prohibited. We are currently evaluating the impact of the pending adoption
of FSP FAS 142-3 on our consolidated financial statements.
Item
7. Financial Statements
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors of
Bridgeline
Software, Inc:
We have
audited the consolidated balance sheets of Bridgeline Software, Inc. (the
“Company”) as of September 30, 2008 and 2007, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Bridgeline Software, Inc. as
of September 30, 2008 and 2007, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ UHY
LLP
December
29, 2008
Boston,
Massachusetts
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except per share data)
|
ASSETS
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,911
|
|
|
$
|
5,219
|
|
|
Accounts
receivable (less allowance for doubtful accounts of $380 and $101,
respectively)
|
|
|
4,024
|
|
|
|
2,892
|
|
|
Unbilled
receivables
|
|
|
1,576
|
|
|
|
355
|
|
|
Prepaid
expenses and other current assets
|
|
|
529
|
|
|
|
192
|
|
|
Total
current assets
|
|
|
8,040
|
|
|
|
8,658
|
|
|
Equipment
and improvements, net
|
|
|
1,763
|
|
|
|
961
|
|
|
Definite-lived
intangible assets, net
|
|
|
2,980
|
|
|
|
1,441
|
|
|
Goodwill,
net of preliminary impairment charge of $9,752
|
|
|
10,725
|
|
|
|
14,426
|
|
|
Other
assets
|
|
|
751
|
|
|
|
273
|
|
|
Total
assets
|
|
$
|
24,259
|
|
|
$
|
25,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
Capital
lease obligations – current
|
|
|
105
|
|
|
|
76
|
|
|
Accounts payable
|
|
|
1,770
|
|
|
|
652
|
|
|
Deferred revenue
|
|
|
1,176
|
|
|
|
725
|
|
|
Accrued liabilities
|
|
|
1,860
|
|
|
|
1,266
|
|
|
Total
current liabilities
|
|
|
5,911
|
|
|
|
2,719
|
|
|
Capital
lease obligations, less current portion
|
|
|
139
|
|
|
|
146
|
|
|
Other
long term liabilities
|
|
|
19
|
|
|
|
19
|
|
|
Total
liabilities
|
|
|
6,069
|
|
|
|
2,884
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock — $0.001 par value; 1,000,000 shares Authorized; none issued
and outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common
stock — $0.001 par value; 20,000,000 shares authorized: 10,665,533
and 8,648,950 shares issued and outstanding, respectively
|
|
|
11
|
|
|
|
9
|
|
|
Additional
paid-in capital
|
|
|
34,647
|
|
|
|
28,908
|
|
|
Accumulated
deficit
|
|
|
(16,369
|
)
|
|
|
(6,060
|
)
|
|
Accumulated
other comprehensive income
|
|
|
(99
|
)
|
|
|
18
|
|
|
Total
shareholders’ equity
|
|
|
18,190
|
|
|
|
22,875
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
24,259
|
|
|
$
|
25,759
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars
in thousands, except per share data)
|
|
|
Year
Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Application
development services
|
|
$
|
16,527
|
|
|
$
|
8,659
|
|
|
Managed
services
|
|
|
3,683
|
|
|
|
2,050
|
|
|
Perpetual
Licenses and subscriptions
|
|
|
1,085
|
|
|
|
442
|
|
|
Total
revenue
|
|
|
21,295
|
|
|
|
11,151
|
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
Application
development services
|
|
|
9,683
|
|
|
|
4,558
|
|
|
Managed
services
|
|
|
471
|
|
|
|
436
|
|
|
Perpetual
Licenses and subscriptions
|
|
|
151
|
|
|
|
26
|
|
|
Total
cost of revenue
|
|
|
10,305
|
|
|
|
5,020
|
|
|
Gross
profit
|
|
|
10,990
|
|
|
|
6,131
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
6,294
|
|
|
|
3,488
|
|
|
General and administrative
|
|
|
3,531
|
|
|
|
2,489
|
|
|
Research
and development
|
|
|
619
|
|
|
|
791
|
|
|
Depreciation and amortization
|
|
|
1,051
|
|
|
|
369
|
|
|
Impairment
of definite-lived intangible assets
|
|
|
76 |
|
|
|
—
|
|
|
Impairment
of goodwill
|
|
|
9,752
|
|
|
|
—
|
|
|
Total
operating expenses
|
|
|
21,323
|
|
|
|
7,137
|
|
|
Loss
from operations
|
|
|
(10,333
|
)
|
|
|
(1,006
|
)
|
|
Interest
and other expense
|
|
|
(61
|
)
|
|
|
(924
|
)
|
|
Other
income
|
|
|
85
|
|
|
|
33
|
|
|
Loss
before income taxes
|
|
|
(10,309
|
)
|
|
|
(1,897
|
)
|
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(10,309
|
)
|
|
$
|
(1,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(1.09)
|
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
| Number
of weighted average shares: |
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
9,473,408
|
|
|
|
5,285,787
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars
in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
| |
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
| |
|
|
|
|
Par
|
|
|
Paid
in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
| |
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Balance,
October 1, 2006
|
|
|
4,273,833 |
|
|
$ |
4 |
|
|
$ |
9,791 |
|
|
$ |
(4,163 |
) |
|
$ |
— |
|
|
|
5,632 |
|
|
Stock
based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
332 |
|
|
|
— |
|
|
|
— |
|
|
|
332 |
|
|
Exercise
of stock options
|
|
|
27,831 |
|
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
Exercise
of stock warrants and options
|
|
|
59,724 |
|
|
|
— |
|
|
|
33 |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
|
Issuance
of common stock and options in connection with
acquisitions
|
|
|
1,087,562 |
|
|
|
1 |
|
|
|
5,195 |
|
|
|
— |
|
|
|
— |
|
|
|
5,196 |
|
|
Issuance
of common stock in initial public offering
|
|
|
3,200,000 |
|
|
|
4 |
|
|
|
13,531 |
|
|
|
— |
|
|
|
— |
|
|
|
13,535 |
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,897 |
) |
|
|
— |
|
|
|
(1,897 |
) |
|
Foreign
currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
18 |
|
|
Total
comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(1,879 |
) |
|
Balance,
September 30, 2007
|
|
|
8,648,950 |
|
|
|
9 |
|
|
|
28,908 |
|
|
|
(6,060 |
) |
|
|
18 |
|
|
|
22,875 |
|
|
Stock
based compensation
|
|
|
— |
|
|
|
— |
|
|
|
425 |
|
|
|
— |
|
|
|
— |
|
|
|
425 |
|
|
Exercise
of stock options
|
|
|
6,667 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Exercise
of stock warrants
|
|
|
160,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance
of common stock and options in connection with
acquisitions
|
|
|
1,767,758 |
|
|
|
2 |
|
|
|
5,047 |
|
|
|
— |
|
|
|
— |
|
|
|
5,049 |
|
|
Issuance
of common stock and options in connection with earnouts
|
|
|
82,158 |
|
|
|
— |
|
|
|
267 |
|
|
|
— |
|
|
|
— |
|
|
|
267 |
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,309 |
) |
|
|
— |
|
|
|
(10,309 |
) |
|
Foreign
currency translation Adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(117 |
) |
|
|
(117 |
) |
|
Total
comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,426 |
) |
|
Balance,
September 30, 2008
|
|
|
10,665,533 |
|
|
$ |
11 |
|
|
$ |
34,647 |
|
|
$ |
(16,369 |
) |
|
$ |
(99 |
) |
|
|
18,190 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in thousands)
|
|
|
Year
Ended
September
30,
|
|
|
Cash
flows from operating activities:
|
|
2008
|
|
|
2007
|
|
|
Net
loss
|
|
$
|
(10,309
|
)
|
|
$
|
(1,897
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
578
|
|
|
|
244
|
|
|
Amortization
of intangible assets
|
|
|
672
|
|
|
|
158
|
|
|
Amortization
of debt discount and deferred financing fees
|
|
|
—
|
|
|
|
576
|
|
|
Stock
based compensation
|
|
|
425
|
|
|
|
332
|
|
|
Gain
on sale of assets
|
|
|
—
|
|
|
|
(1
|
)
|
|
Impairment
of goodwill and other intangible assets
|
|
|
9,828
|
|
|
|
—
|
|
|
Changes
in operating assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and unbilled receivables
|
|
|
(993
|
)
|
|
|
(539
|
)
|
|
Other
assets
|
|
|
(560
|
)
|
|
|
30
|
|
|
Accounts
payable and accrued liabilities
|
|
|
124
|
|
|
|
422
|
|
|
Deferred
revenue
|
|
|
(152
|
)
|
|
|
(309
|
)
|
|
Total
adjustments
|
|
|
9,922
|
|
|
|
913
|
|
|
Net
cash used in operating activities
|
|
|
(387
|
)
|
|
|
(984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired
|
|
|
(1,812
|
)
|
|
|
(4,230
|
)
|
|
Proceeds
from sale of assets
|
|
|
—
|
|
|
|
15
|
|
|
Contingent acquisition payments
|
|
|
(528
|
)
|
|
|
(455
|
)
|
|
Software
development expenditures
|
|
|
(397
|
)
|
|
|
—
|
|
|
Equipment
and improvements expenditures
|
|
|
(980
|
)
|
|
|
(457
|
)
|
|
Net
cash used in investing activities
|
|
|
(3,717
|
)
|
|
|
(5,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
(Payments
on)/proceeds from issuance of senior notes payable, net of deferred
costs
|
|
|
—
|
|
|
|
(2,800
|
)
|
|
Proceeds
from issuance of common stock, net of $2,434 in fees
|
|
|
—
|
|
|
|
13,535
|
|
|
Proceeds
from notes payable from shareholders
|
|
|
— |
|
|
|
200
|
|
|
Proceeds
from bank line of credit
|
|
|
1,000
|
|
|
|
|
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
—
|
|
|
|
59
|
|
|
Principal
payments on capital leases
|
|
|
(202
|
)
|
|
|
(54
|
)
|
|
Principal
payments on notes payable to shareholders
|
|
|
—
|
|
|
|
(200
|
)
|
|
Net
cash provided by financing activities
|
|
|
798
|
|
|
|
10,740
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease)/increase in cash
|
|
|
(3,308
|
)
|
|
|
4,628
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
5,219
|
|
|
|
591
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,911
|
|
|
$
|
5,219
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
54
|
|
|
$
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash activities:
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for acquisitions
|
|
$
|
5,316
|
|
|
$
|
5,196
|
|
|
Warrants
issued in connection with equity and debt
transactions
|
|
$
|
—
|
|
|
$
|
531
|
|
|
Purchase
of capital equipment through capital leases
|
|
$
|
71
|
|
|
$
|
63
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BRIDGELINE SOFTWARE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except share and per share data)
1.
Description of Business and Basis of Presentation
Description
of Business
Bridgeline
Software, Inc. (“Bridgeline” or the “Company”), was incorporated in Delaware on
August 28, 2000. Bridgeline, operating as a single segment, is a developer of
Web application management software and web
applications. Bridgeline’s web application management software
products, iAPPS®,
Base10® and
Orgitecture™, are SaaS (software as a service) solutions that unify Content
Management, Analytics, eCommerce, and eMarketing capabilities. The
Company’s in-house team of Microsoft®-certified
developers specialize in web application development, information architecture,
usability engineering, SharePoint development, rich media development, search
engine optimization, and fully-managed application hosting.
The
Company’s principal executive offices are located at 10 Sixth Road, Woburn,
Massachusetts, and it maintains offices in New York, NY; Washington, D.C.;
Atlanta, GA; Chicago, IL; Cleveland, OH, Minneapolis, MN, and in Denver,
CO. The Company also operates a wholly owned subsidiary, Bridgeline
Software Pvt. Ltd, founded in 2003, as its software development center located
in Bangalore, India. The Company maintains a website at
www.bridgelinesw.com.
On June
28, 2007, the Company completed an equity offering of 3.2 million shares raising
approximately $13.5 million in capital, net of fees. The Company’s
stock is traded under the ticker symbol BLSW on NASDAQ. During fiscal
2008, the Company completed two acquisitions. A further description
of these transactions is contained in Note 3 below.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
Indian subsidiary. All significant inter-company accounts and transactions have
been eliminated.
2.
Summary of Significant Accounting Policies
Revenue
Recognition
The
Company enters into arrangements to sell services, software licenses or
combinations thereof. Revenue is generated from three activities:
Application Development Services, Managed Services, and Perpetual Licenses and
Subscriptions.
The
Company recognizes revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104, Revenue Recognition in Financial
Statements (“SAB 104”), Emerging Issues Task Force Issue No. 00-21, Accounting For Revenue Arrangements
with Multiple Deliverables (“EITF 00-21”), and American Institute of
Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition
(“SOP 97-2”) and related interpretations. Revenue is recognized when all
of the following conditions are satisfied: (1) there is persuasive evidence of
an arrangement; (2) delivery has occurred or the services have been provided to
the customer; (3) the amount of fees to be paid by the customer is fixed or
determinable; and (4) the collection of the fees is reasonably assured. Billings
made or payments received in advance of providing services are deferred until
the period these services are provided.
Application Development
Services
Application
development services include professional services primarily related to the
Company’s Web development solutions that address specific customer needs such as
information architecture and usability engineering, interface configuration,
application development, rich media, e-Commerce, e-Learning and e-Training,
search engine optimization, and content management. Application development
services engagements often include a hosting arrangement that provides for the
use of certain hardware and infrastructure, generally at the Company’s network
operating center. As described further below, revenue for these hosting
arrangements is included in Managed Services. Application development services
engagements that include hosting arrangements are accounted for as multiple
element arrangements as described below under “Multiple-Element
Arrangements.”
For
application development services engagements sold on a stand alone basis,
revenue is recognized in accordance with SAB 104. Application
development services are contracted for on either a fixed price or time and
materials basis. For its fixed price engagements, the Company applies
the proportional performance model to recognize revenue
based on
cost incurred in relation to total estimated cost at completion. The Company has
determined that labor costs are the most appropriate measure to allocate revenue
among reporting periods, as they are the primary input when providing
application development services. Customers are invoiced monthly or upon the
completion of milestones. For milestone based projects, since milestone pricing
is based on expected hourly costs and the duration of such engagements is
relatively short, this input approach principally mirrors an output approach
under the proportional performance model for revenue recognition on such fixed
priced engagements. For time and materials contracts, revenues are
recognized as the services are provided.
Application
development services are often sold as part of multiple element arrangements
wherein perpetual licenses for the Company’s software products, retained
professional services, hosting and/or subscriptions are provided in connection
with application development services engagements. The Company’s
revenue recognition policy with respect to these multiple element arrangements
is described further below under the caption “Multiple Element
Arrangements.”
Managed
Services
Managed
services primarily include on-going retained professional services, hosting
services, and post contract customer support services (“PCS”).
Retained
professional services are either contracted for on an “on call” basis or for a
certain amount of hours each month. Such arrangements generally provide for a
guaranteed availability of a number of professional services hours each month on
a “use it or lose it” basis. For retained professional services
sold on a stand-alone basis, revenue is recognized in accordance with SAB
104. The Company recognizes revenue as the services are delivered or
over the term of the contractual retainer period. These arrangements
do not require formal customer acceptance and do not grant any future right to
labor hours contracted for but not used.
Hosting
arrangements provide for the use of certain hardware and infrastructure,
generally at the Company’s network operating centers. The majority of
the customers under contractual hosting arrangements have been previous
application development services customers. Set-up costs associated with hosting
arrangements are not significant and when charged are recognized ratably over
the expected period of performance, generally twenty-four
months. Hosting agreements are typically month-to-month arrangements
that provide for termination for convenience by either party generally upon
30-days notice. Revenue is recognized monthly as the hosting services
are delivered. As described below, hosting revenues associated
with the Company’s subscriptions are included in subscriptions
revenue.
Retained
professional services are sold on a stand-alone basis or in multiple
element arrangements with application development services and, occasionally,
subscriptions. Hosting services are typically sold in connection with
application development services but also may be sold on a stand-alone
basis. The Company’s revenue recognition policy with respect to
multiple element arrangements is described further below under the caption
“Multiple Element Arrangements.”
PCS
includes a provision for unspecified product upgrades, error or bug fixes, and
telephone and online support during the Company’s normal business
hours. Revenue for PCS sold separately is recognized ratably on a
straight-line basis over the period of performance, typically twelve
months. Vendor specific objective evidence (“VSOE”) is established
for PCS and is based on the price of PCS when sold separately, which has been
established via annual renewal rates and is a consistent percentage of the
stipulated software license fee. Revenue recognition for PCS sold as
part of a multiple element arrangement is described further below under the
caption “Multiple Element Arrangements.”
Perpetual
Licenses and Subscriptions
The
Company licenses its software on a perpetual and subscription basis. Customers
who license the software on a perpetual basis receive rights to use the software
for an indefinite time period. For arrangements that consist of a
perpetual license and PCS, the PCS revenue is recognized ratably on a
straight-line basis over the period of performance and the perpetual license is
recognized on a residual basis in accordance with AICPA SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. Under
the residual method, the fair value of the undelivered elements are deferred and
the remaining portion of the arrangement fee is allocated to the delivered
elements and recognized as revenue, assuming all other revenue recognition
criteria have been met. Revenue recognition for perpetual licenses
sold as part of a multiple element arrangement is described further below under
the caption “Multiple Element Arrangements.”
Customers
also license the software on a subscription basis, which can be described as
“Software as a Service” or “SaaS”. SaaS is a model of software
deployment where an application is hosted as a service provided to customers
across the Internet. Subscription agreements include access to the
Company’s software application via an internet connection, the related hosting
of the application, and PCS. Customers receive automatic updates and
upgrades, and new releases of the products as soon as they become
available. Subscription agreements are generally month-to-month
arrangements
that provide for termination for convenience by either party upon 30 to 45 days
notice. Revenue is recognized monthly as the services are delivered.
Any up front set-up fees are amortized over 24 months. The Company
has concluded that its Subscription Agreements are outside the scope of SOP 97-2
since the software is only accessible through a hosting arrangement with the
Company and the customer cannot take possession of the
software. Revenue recognition for Subscriptions sold as part of a
multiple element arrangement is described further below under the caption
“Multiple Element Arrangements.”
Multiple Element
Arrangements
As
described above, application development services are often sold as part of
multiple element arrangements. Such arrangements may include delivery
of a perpetual license for the Company’s software products at the commencement
of an application development services engagement or delivery of retained
professional services, hosting services and/or subscriptions subsequent to
completion of such engagement, or combinations thereof. In accounting
for these multiple element arrangements, the Company follows SOP 97-2 or EITF
00-21, as applicable. As described further below, the Company has concluded
that each element can be treated as a separate unit of accounting when following
EITF 00-21.
When the
Company licenses its software on a perpetual basis in a multiple element
arrangement that also includes application development services and PCS, VSOE of
each element is considered. VSOE is established for PCS and is based
on the price of PCS when sold separately, which has been established via annual
renewal rates. Revenue recognition for perpetual licenses sold with
application development services are considered on a case by case
basis. The Company has not established VSOE for perpetual licenses or
fixed price development services and therefore in accordance with SOP 97-2, when
perpetual licenses are sold in a multiple element arrangements including
application development services where VSOE for the services has not
been established, the license revenue is deferred and recognized under the
proportional performance model along with the associated application development
services. For the year ended September 30, 2008, the Company has
recognized revenues of $224 thousand for perpetual
licenses. In determining VSOE for the application
development services element, the separability of the application development
services from the software license and the value of the services when sold on a
standalone basis is considered. The Company also considers the
categorization of the services, the timing of when the services contract was
signed in relation to the signing of the perpetual license contract and delivery
of the software, and whether the services can be performed by
others. The Company has concluded that its application development
services are not required for the customer to use the product but, rather
enhance the benefits that the software can bring to the customer. In
addition, the services provided do not result in significant customization or
modification of the software and are not essential to its functionality, and can also
be performed by the customer or a third party. If an application
development services arrangement does qualify for separate accounting, the
Company recognizes the perpetual license on a residual basis. If a
application development services arrangement does not qualify for separate
accounting, the Company recognizes the perpetual license under the proportional
performance model as described above.
When
subscription arrangements are sold with application development services, we
follow EITF 00-21 and have concluded that each element can be treated as a
separate unit of accounting. In determining separability, the timing
of the commencement of the subscription period to the services delivery is
considered. If the subscription period begins after the services
delivery then the Company generally recognizes the services as delivered and
then commences revenue recognition for the subscription after the services have
been delivered. To date, all subscription periods have commenced
after the services delivery. If the application development services
arrangement does not qualify for separate accounting, the application
development services revenues and related costs are deferred and recognized over
the subscription period. Subscriptions also include a PCS component,
and the Company has determined that the two elements cannot be separated and
must be recognized as one unit over the applicable service period.
Customer Payment
Terms
The
Company’s payment terms with customers typically are “net 30 days from invoice”.
Payment terms may vary by customer but generally do not exceed 60 days from
invoice date. For Application Development Services, the Company typically
invoices project deposits of between 20% and 33% of the total contract value
which are recorded as deferred revenue until such time the related services are
completed. Subsequent invoicing for Application Development Services is either
monthly or upon achievement of milestones and payment terms for such billings
are within the standard terms described above. Invoicing for subscriptions and
hosting are typically issued monthly and are generally due upon invoice receipt.
The Company’s agreements with customers do not provide for any refunds for
services or products and therefore no specific reserve for such is maintained.
In the infrequent instances where customers raise concerns over
delivered products or services, the Company has endeavored to remedy the
concern and all costs related to such matters have been insignificant in all
periods presented.
Warranty
Certain
arrangements include a warranty period generally between 30 to 90 days from the
completion of work. In hosting arrangements, the Company may provide warranties
of up-time reliability. The Company continues to monitor the conditions that are
subject to the warranties to identify if a warranty claim may arise. If the
Company determines that a
warranty
claim is probable, then any related cost to satisfy the warranty obligation is
estimated and accrued. Warranty claims to date have been
immaterial.
Reimbursable
Expenses
In
connection with certain arrangements, reimbursable expenses are incurred and
billed to customers and such amounts are recognized as both revenue and cost of
revenue.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reported periods. The most significant estimates included in these financial
statements are the valuation of accounts receivable and long-term assets,
including intangibles, goodwill and deferred tax assets, stock-based
compensation, amounts of revenue to be recognized on service contracts in
progress, unbilled receivables, and deferred revenue. Actual results could
differ from these estimates under different assumptions or
conditions.
The
complexity of the estimation process and factors relating to assumptions, risks
and uncertainties inherent with the use of the proportional performance model
affect the amounts of revenues and related expenses reported in the Company’s
financial statements. A number of internal and external factors can affect the
Company’s estimates including utilization variances and specification and test
requirement changes.
Segment
Information
The
Company is structured and operates internally as one reportable operating
segment as defined in Statement of Financial Accounting Standard (“SFAS”)
No. 131, Disclosures
about Segments of an Enterprise and Related Information (“SFAS 131”).
SFAS 131 establishes standards for the way public business enterprises report
information about operating segments in annual consolidated financial statements
and requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Although the Company had seven U.S. operating locations and an Indian
subsidiary at September 30, 2008, under the aggregation criteria set forth
in SFAS 131, the Company operates in only one reportable operating segment since
each location has similar economic characteristics.
Concentration
of Credit Risk, Significant Customers and Off-Balance Sheet Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents to the extent these exceed
federal insurance limits and accounts receivable. Risks associated with cash and
cash equivalents are mitigated by the Company’s investment policy, which limits
the Company’s investing of excess cash into only money market mutual funds. The
Company limits its exposure to credit loss by placing its cash and cash
equivalents and investments with financial institutions it believes to be of
higher quality. In general, the Company does not require collateral
on its arrangements with customers. The Company has accounts receivable related
to monthly fees as well as service and licensing fees, which typically provide
for credit terms of 30-60 days.
The
Company had one customer that individually represented 10% or more of the
Company’s total revenue, as follows:
|
|
|
Year
Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Customer
#1
|
|
|
*%
|
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had certain customers with receivables balances that individually
represented 10% or more of the Company’s total accounts receivable, as
follows:
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Customer
#1
|
|
|
*%
|
|
|
|
*%
|
|
|
Customer
#2
|
|
|
*%
|
|
|
|
10%
|
|
|
Customer
#3
|
|
|
*%
|
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Represents less than 10%
|
|
|
|
|
|
|
|
|
The
Company has no significant off-balance sheet risks such as foreign exchange
contracts, interest rate swaps, option contracts or other foreign hedging
agreements.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with original maturity of three
months or less from the date of purchase to be cash equivalents. Cash
equivalents primarily consist of money market mutual funds.
Fair
Value of Financial Instruments
The
carrying amounts of financial instruments, including cash and cash equivalents,
receivables, accounts payable, bank line of credit and senior notes payable
approximate their fair value because of the short-term maturity of these
instruments. Based on rates available to the Company at September 30, 2008 and
2007 for loans with similar terms, the carrying values of capital lease
obligations approximate their fair value.
Impairment
of Long-Lived and Intangible Assets
Long-lived
assets to be held and used, which primarily consist of equipment and
improvements and intangible assets with finite lives, are recorded at cost.
Management reviews long-lived assets (other than goodwill) for impairment
whenever events or changes in circumstances indicate the carrying amount of such
assets is less than the undiscounted expected cash flows from such assets, or
whenever changes or business circumstances indicate that the carrying value of
the assets may not be fully recoverable or that the useful lives of those assets
are no longer appropriate. Recoverability of these assets is assessed using a
number of factors including operating results, business plans, budgets, economic
projections and undiscounted cash flows. In addition, the Company’s evaluation
considers non-financial data such as market trends, product development cycles
and changes in management’s market emphasis. For the definite-lived intangible
asset impairment review, the carrying value of the intangible assets is compared
against the estimated undiscounted cash flows to be generated over the remaining
life of the intangible assets. Based upon the results, the Company
recognized an impairment charge of $76 thousand related to customer
relationships, non-compete agreements and trade names as of September 30,
2008. Except as described below, there has been no other impairment
loss recorded for long-lived and intangible assets to date.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. For all
customers, the Company recognizes allowances for doubtful accounts based on the
length of time that the receivables are past due, current business environment
and its historical experience. If the financial condition of the Company’s
customers were to deteriorate, resulting in impairment of their ability to make
payments, additional allowances may be required.
Research
and Development Costs
Research
and development expenditures for technology development are charged to
operations as incurred. Pursuant to SFAS No. 86, certain software
development costs incurred subsequent to the establishment of technological
feasibility are capitalized and amortized to cost of sales. Based on
the Company’s product development process, technological feasibility is
established upon completion of a working model. Certain costs incurred between
completion of a working model and the point at which the product is ready for
general release are capitalized if significant. The Company capitalized $397
thousand and $0 of costs in 2008 and 2007, respectively.
During
our fiscal year 2005, a research and development center in Bangalore, India was
established by the Company to manage the Company’s technology development
requirements. Since inception, the Company has derived technology benefits from
engagements with customers; however it is not possible to track and quantify
such costs separately for any periods.
Equipment
and Improvements
The
components of equipment and improvements are stated at cost. The Company
provides for depreciation by use of the straight-line method over the estimated
useful lives of the related assets (three to five years). Leasehold improvements
are amortized by use of the straight-line method over the lesser of the
estimated useful life of the asset or the lease term. Repairs and maintenance
costs are expensed as incurred.
Internal
Use Software
In
accordance with EITF No. 00-2, Accounting for Web Site Development
Costs, and EITF No. 00-3, Application of AICPA Statement of
Position, or SOP, No. 97-2 to Arrangements That Include the Right to Use
Software Stored on Another Entity’s Hardware, we apply AICPA SOP
No. 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.
The costs incurred in the preliminary stages of development are expensed as
incurred. Once an application has reached the development stage, internal and
external costs, if direct and
Definite
Lived Intangible Assets
Definite-lived
intangible assets are amortized over their useful lives, generally three to ten
years, and are subject to impairment tests as previously described under
Impairment of Long-Lived and
Intangible Assets.
Deferred
Financing Fees
In April
2006, the Company incurred $472 thousand of direct costs in connection with the
issuance of $2.8 million in Senior Notes Payable, which includes the fair value
of underwriter debt warrants of $106 thousand (See Note 7). These costs were
being amortized using the straight-line method, over the one year term of
the notes and were fully amortized upon repayment of the notes in July
2007.
Deferred
Offering Costs
The
Company incurred costs of $2.5 million in connection with the initial public
offering.
Contingent
Consideration
In
accordance with EITF Issue No. 95-8, Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination, consideration is recorded as additional purchase
price if the consideration is unrelated to continuing employment with the
Company and meets all other relevant criteria. Such consideration is paid when
the contingency is resolved subsequent to acquisition and is recorded as
additional goodwill resulting from the business combination.
Goodwill
The
excess of the cost of an acquired entity over the amounts assigned to acquired
assets and liabilities is recognized as goodwill. Goodwill is tested for
impairment annually and more frequently if events and circumstances indicate
that the asset might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the fair value calculated at a reporting unit
level. The Company has determined that its operating locations can be aggregated
as a single reporting unit due to their similar economic characteristics. For
goodwill, the impairment determination is made at the reporting unit level and
consists of two steps. First, the Company estimates the fair value of the
reporting unit and compares it to its carrying amount. Second, if the carrying
amount of the reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting unit’s
goodwill over the implied fair value of that goodwill. The implied fair value of
goodwill is estimated by allocating the estimated fair value of the reporting
unit in a manner similar to a purchase price allocation, in accordance with
Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS
141”). The residual estimated fair value after this allocation is the implied
fair value of the reporting unit’s goodwill.
The
factors the Company considers important that could indicate impairment include
significant under performance relative to prior operating results, change in
projections, significant changes in the manner of the Company’s use of assets or
the strategy for the Company’s overall business, and significant negative
industry or economic trends.
In
evaluating the impairment of goodwill, the Company considers a number of factors
such as market capitalization value, discounted cash flow projections, guideline
public company comparisons and acquisition transactions of comparable third
party companies. The process of evaluating the potential impairment of goodwill
is highly subjective and requires significant judgment at many points during the
analysis, especially with regard to the future cash flows of the Company. In
estimating fair value of such, management makes estimates and judgments about
the future cash flows of the Company.
The
Company evaluates goodwill on an annual basis in the fourth fiscal quarter of
each year for impairment. The results of this review indicated that
the carrying value of goodwill was impaired as of September 30,
2008. In accordance with the provisions of SFAS No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”), and SFAS No.
157, “Fair
Value
Measurements”
(“SFAS No. 157”) management placed significant weighting in its evaluation on
the fair value derived using the Direct Market Data Method or market
capitalization value as this Level 1 input to valuation is afforded the highest
consideration as it is based upon quoted prices of the Company’s common stock in
the active market. The impact of the current recession on fourth
quarter revenues and the 52% decline in our stock price since June 30, 2008 was
also considered in the analysis. Based upon the results of the
valuation techniques utilized, the Company recognized an impairment charge of
$9.8 million for the fiscal year ended September 30, 2008 related to goodwill
and definite-lived intangible assets, respectively.
For the
definite-lived intangible asset impairment review, the Company compared the
carrying value of the intangible assets against the estimated undiscounted cash
flows to be generated over the remaining life of the intangible assets. Based
upon the results, the Company recognized an impairment charge of $76 thousand
related to certain definite-lived intangible assets.
For the
goodwill impairment evaluation, the Company is required to perform a second step
of the goodwill impairment test, used to measure the amount of impairment loss
that compares the implied fair value of our one reporting unit goodwill with the
carrying amount of that goodwill. The Company expects to complete
this analysis in its first quarter of fiscal 2009.
Advertising
Costs
All
advertising costs are expensed when incurred. Advertising costs were $258
thousand and $65 thousand for the years ended September 30, 2008 and 2007,
respectively.
Stock-Based
Compensation
The
Company maintains two stock-based compensation plans which are more fully
described in Note 9.
The
Company accounts for stock compensation awards in accordance with SFAS
No. 123R, Share-Based
Payments (“SFAS 123R”). which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25
(“APB 25”), Accounting for Stock Issued to Employees, and related
interpretations. SFAS 123(R) requires that share-based payments (to
the extent they are compensatory) be recognized in the Company’s consolidated
statements of operations based on their fair values. In addition, the Company
has applied the provisions of the SEC’s Staff Accounting Bulletin No.107 in
its accounting for Statement 123R. When adopting SFAS 123(R) on
October 1, 2006, the Company applied the modified prospective approach to
transition. Under the modified prospective approach, the provisions
of SFAS 123(R) are to be applied to new awards and to awards modified,
repurchased, or cancelled after the required effective date. Additionally,
compensation cost for the portion of awards for which the requisite service has
not been rendered that are outstanding as of the required effective date shall
be recognized as the requisite service is rendered on or after the required
effective date. Through September 30, 2006, the Company accounted for
stock compensation awards under the provisions of SFAS No. 123, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition
and Disclosure (“SFAS 148”). As permitted by SFAS 123, for all
periods through September 30, 2006, the Company measured compensation cost in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (“APB 25”) and related interpretations using the intrinsic
value method and following the disclosure-only provisions of SFAS
123.
At
September 30, 2008, there was approximately $754 thousand of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under all equity compensation plans.
Valuation
of Options and Warrants Issued to Non-Employees
The
Company measures expense for non-employee stock-based compensation and the
estimated fair value of options exchanged in business combinations and warrants
issued for services using the fair value method for services received or the
equity instruments issued, whichever is more readily measured in accordance with
SFAS 123R and EITF Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling Goods or Services. The Company estimated the fair value of stock
options and warrants issued to non-employees using the Black-Scholes-Merton
option valuation model (the “Model”). The following
table illustrates the inputs and assumptions used by the Company in the
application of the Model to estimate the fair value for fully vested stock
options granted to non-employees as follows:
|
|
|
Year
Ended
September
30, 2007
|
|
|
Options
granted to non-employees
|
|
|
—
|
|
|
Warrants
granted to non-employees
|
|
|
150,000
|
|
|
Contractual
lives in years
|
|
|
5
|
|
|
Estimated
fair value of common stock
|
|
$
|
2.73
|
|
|
Exercise
prices
|
|
$
|
7.50
|
|
|
Estimated
stock volatility
|
|
|
72%
|
|
|
Risk
free rate of return
|
|
5.22%
|
|
|
Dividend
Rate
|
|
|
0%
|
|
There
were no options or warrants issued to non-employees in fiscal 2008.
The
intrinsic value of the options outstanding at September 30, 2008 was
approximately $725
thousand of which $639 thousand
related to vested options and $86 thousand related to unvested
options.
Employee
Benefits
The
Company sponsors a contributory 401(k) plan covering all full-time employees who
meet prescribed service requirements. The Company is not required to make
matching contributions, although the plan provides for discretionary
contributions by the Company. The Company made no contributions in either fiscal
2008 or 2007.
Income
Taxes
Deferred
income taxes are recognized based on temporary differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the temporary differences are expected to reverse.
Valuation allowances are provided if, based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
The
Company does not provide for U.S. income taxes on the undistributed earnings of
its Indian subsidiary, which the Company considers to be permanent
investments.
Net
Loss Per Share of Common Stock
Basic
loss per common share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding.
Diluted loss per common share is computed similarly to basic loss per common
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were not
anti-dilutive. The Company has excluded all outstanding options, warrants and
convertible debt from the calculation of diluted weighted average shares
outstanding because these securities were anti-dilutive for all periods
presented. The number of potential shares represented by these excluded equity
instruments was 1,908,018 and 1,544,831 at September 30, 2008 and 2007,
respectively.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS
141R”), which replaces FASB Statement No. 141 (“SFAS 141”), Business Combinations. This
Statement retains the fundamental requirements in SFAS 141 that the acquisition
method of accounting be used for all business combinations and for an acquirer
to be identified for each business combination. SFAS 141R defines the acquirer
as the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. SFAS 141R will require an entity to record
separately from the business combination the direct costs, where previously
these costs were included in the total allocated cost of the
acquisition. SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
entity at the acquisition date, at their fair values as of that
date. This compares to the cost allocation method previously required
by SFAS No. 141. SFAS 141R will require an entity to recognize as an
asset or liability at fair value for certain contingencies, either contractual
or non-contractual, if certain criteria are met. Finally, SFAS 141R
will require an entity to recognize contingent consideration at the date of
acquisition, based on the fair value at that date. This Statement
will be effective for business combinations completed in or after the first
annual reporting period beginning on or after December 15,
2008. Early adoption of this standard is not permitted and the
standards are to be applied prospectively only. Upon adoption of this
standard, there will be no impact to the Company’s results of operations and
financial condition for acquisitions previously completed. The
adoption of this standard will impact any acquisitions completed by the Company
in our fiscal 2010.
In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”), an amendment of Accounting
Research Bulletin No. 51. The standard changes the accounting for noncontrolling
(minority) interests in consolidated financial statements including the
requirements to classify noncontrolling interests as a component of consolidated
stockholders’ equity, and the elimination of “minority interest” accounting in
results of operations with earnings attributable to noncontrolling interests
reported as a part of consolidated earnings. Additionally, SFAS 160 revises the
accounting for both increases and decreases in a parent’s controlling ownership
interest. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. We are currently
evaluating the impact of the pending adoption of SFAS 160 on our consolidated
financial statements.
In March
2008, the FASB issued Statement No.161 (“SFAS 161”), Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133. SFAS 161 requires disclosure of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for and how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS 161 is
effective for fiscal years beginning after November 15, 2008, with early
adoption permitted. We are currently evaluating the impact of the pending
adoption of SFAS 161 on our consolidated financial
statements.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB Statement No.142,
Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal
years beginning after December 15, 2008 and early adoption is prohibited. We are
currently evaluating the impact of the pending adoption of FSP FAS 142-3 on our
consolidated financial statements.
3. Acquisitions
Indigio
Group, Inc.
On July
1, 2008, the Company acquired all the outstanding stock of Indigio Group, Inc.
(“Indigio”), a Denver, Colorado-based company founded in
1998. Indigio is an award-winning web development company that
provides web application development, web design, usability, and search engine
optimization services to its customers. The acquisition of Indigio expands the
geographical presence of the Company consistent with its
strategy. Consideration for the acquisition of Indigio consisted of
(i) $600,000 in cash, (ii) 1,127,810 shares of Bridgeline common stock,
(iii) the payment of $195,000 of indebtedness owed by Indigio, and (iv) deferred
consideration of up to $2.1 million payable in cash quarterly over the 14
consecutive calendar quarters after the acquisition, contingent upon Indigio
achieving certain financial goals during such period. If the
contingent payments are made, the Company will account for the payments as
additional purchase price and will allocate it to goodwill.
The
acquisition has been treated as a non-taxable transaction; therefore the
intangible assets, including goodwill, are not tax deductible for the
Company.
Tenth
Floor, Inc.
On
January 31, 2008, the Company acquired all the outstanding stock of Tenth Floor,
Inc. (“Tenth Floor”). Tenth Floor is a web application development
company that has developed its own SaaS-based web application management
software product named BASE-10. Tenth Floor is headquartered in Cleveland, Ohio
with a satellite office in Minneapolis, Minnesota. Bridgeline acquired
Tenth Floor for a total value of approximately $4 million, including the
purchase of approximately $650,000 of Tenth Floor net working capital (cash,
accounts receivable, less certain liabilities). This value consisted of $504,000
in cash, $96,000 of repayment of a bank line of credit, 640,000 shares of
Bridgeline common stock, and the opportunity to receive up to an additional
$1.2 million in cash over a 12 quarter period based on certain minimum operating
income goals being achieved.
The
additional consideration described above is based upon the attainment by the
acquired entity of defined operating objectives. At September 30, 2008, the
maximum remaining future consideration pursuant to this arrangement is
approximately $932 thousand. To date $268 thousand was recorded as an
increase to goodwill under this arrangement.
The
acquisition has been treated as a non-taxable transaction; therefore the
intangible assets, including goodwill, are not tax deductible for the
Company.
The
following table summarizes the estimated fair values of the net assets acquired
through the acquisitions of Tenth Floor and Indigio:
|
|
|
|
|
|
Net
assets acquired:
|
|
|
|
|
Cash
|
|
$ |
38 |
|
|
Other
current assets
|
|
|
1,399 |
|
|
Equipment
|
|
|
314 |
|
|
Other
assets
|
|
|
88 |
|
|
Intangible
assets
|
|
|
2,152 |
|
|
Goodwill
|
|
|
4,644 |
|
|
Total
assets
|
|
|
8,635 |
|
|
Current
liabilities
|
|
|
1,547 |
|
|
Capital
lease obligations
|
|
|
189 |
|
|
Total
liabilities assumed
|
|
|
1,736 |
|
|
Net
assets acquired
|
|
$ |
6,899 |
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
|
Cash
paid
|
|
$ |
1,430 |
|
|
Equity
exchanged
|
|
|
4,992 |
|
|
Options
issued and exchanged
|
|
|
81 |
|
|
Closing
costs and fees
|
|
|
396 |
|
|
Total
purchase price
|
|
$ |
6,899 |
|
Of the
$2.2 million in intangible assets, $1.6 million was assigned to customer
relationships with an average useful life of five years, $236 thousand was
assigned to noncompetition agreements with an average estimated life of five
years and $267 thousand was assigned to acquired technology with an average
estimated life of three years. The Company has engaged a third party firm
to assist them in determining the final the purchase price allocation of
intangible assets acquired in the Indigio acquisition and is expected to
complete the allocation in its first fiscal quarter of 2009.
Purple
Monkey Studios, Inc.
On August
31, 2007, the Company acquired Purple Monkey Studios, Inc. (PM), a
privately-held provider of Web Application Development Services. PM’s
results of operations have been included in the consolidated financial
statements since the date of acquisition. PM specializes in web content
management solutions, interface design, and eTraining applications. Purple
Monkey operates in the Chicago region, serving over 50 customers including
Motorola, Marriott International, American Medical Association, McGraw Hill,
Discovery Communications, and the American Academy of Pediatrics. The
initial consideration of $2.9 million consisted of $723 thousand in cash, $210
thousand of repayment of a bank line of credit and 476,846 shares of
Bridgeline common stock. The former owners of PM also have the
opportunity to receive an additional $900 thousand in cash over a three year
period as additional consideration based on certain minimum operating income
goals being achieved.
The
additional consideration described above is based upon the attainment by the
acquired entity of defined operating objectives. At September 30, 2008, the
maximum remaining future consideration pursuant to this arrangement is
approximately $600 thousand. To date $300 thousand was recorded as an
increase to goodwill under this arrangement.
The
acquisition has been treated as a non-taxable transaction; therefore the
intangible assets, including goodwill, are not tax deductible for the
Company.
Objectware,
Inc.
On July
5, 2007, the Company acquired Objectware, Inc. (OW), a privately held provider
of Web Application Development Services. OW’s results of operations have been
included in the consolidated financial statements since the date of acquisition.
OW is an Atlanta, Georgia-based company that specializes in Web application
development, Web design, wireless application development, search engine
optimization and providing managed Web Development Services to customers. The
initial consideration of $6.7 million for the acquisition of OW consisted of
$3.7 million in cash and 610,716 shares of Bridgeline common
stock. The former owner of OW also has the opportunity to
receive up to $1.8 million as additional consideration payable in cash and stock
quarterly over the three years after the acquisition, contingent upon OW
attaining certain operational performance benchmarks.
The
additional consideration described above is based upon the attainment by the
acquired entity of defined operating objectives. At September 30, 2008,
the maximum remaining future consideration pursuant to this arrangement is
approximately $1.1 million. To date $750 thousand was recorded as an
increase to goodwill under this arrangement.
In
connection with the acquisition of OW, we acquired a note receivable from a
customer of OW. We evaluated the note and the customer’s ability to
pay the note and provided a reserve for 100% of the balance as of the
acquisition date. If the customer ends up paying the entire balance,
the Company will record an adjustment to goodwill associated with the OW
acquisition.
The
acquisition has been treated as a non-taxable transaction; therefore, the
intangible assets, including goodwill, are not tax deductible for the
Company.
The
following table summarizes the estimated fair values of the net assets acquired
through the acquisitions of OW and PM:
|
|
|
|
|
|
Net
assets acquired:
|
|
|
|
|
Cash
|
|
$ |
322 |
|
|
Other
current assets
|
|
|
1,261 |
|
|
Equipment
|
|
|
251 |
|
|
Other
assets
|
|
|
27 |
|
|
Intangible
assets
|
|
|
1,296 |
|
|
Goodwill
|
|
|
7,656 |
|
|
Total
assets
|
|
|
10,813 |
|
|
Current
liabilities
|
|
|
996 |
|
|
Capital
lease obligations
|
|
|
69 |
|
|
Total
liabilities assumed
|
|
|
1,065 |
|
|
Net
assets acquired
|
|
$ |
9,748 |
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
|
Cash
paid
|
|
$ |
3,881 |
|
|
Equity
exchanged
|
|
|
4,983 |
|
|
Options
issued and exchanged
|
|
|
212 |
|
|
Closing
costs and fees
|
|
|
671 |
|
|
Total
purchase price
|
|
$ |
9,748 |
|
Of the
$1.3 million in intangible assets, $1.1 million was assigned to customer
relationships with an average useful life of five years and $142 thousand was
assigned to noncompetition agreements with an average estimated life of five
years.
The
following unaudited pro forma information reflects the results of operations of
the Company as though the acquisitions of Indigio, Tenth Floor, Purple Monkey
and Objectware were completed as of October 1, 2006:
|
|
|
Pro
Forma (Unaudited)
|
|
|
|
|
Years
Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
27,146
|
|
|
$
|
26,961
|
|
|
Net
loss
|
|
$
|
(241
|
)
|
|
$
|
(1,799
|
)
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.23
|
)
|
|
Number
of weighted average shares:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
10,723,839
|
|
|
|
7,994,969
|
|
The
common stock used as consideration for the acquisitions is presented as being
outstanding during the entire period for the computation of weighted average
shares outstanding used in the computation of net loss per share for all periods
above.
Other
Acquisitions:
In
accordance with the applicable merger agreements, the Company is obligated to
pay contingent earn-out to the former shareholders of New Tilt, Inc., acquired
in fiscal 2006, and Interactive Applications Group, Inc., acquired in
fiscal 2005, upon achievement of defined operating
objectives. The Company has paid $624 thousand in contingent payments
to applicable shareholders as of September 30, 2008 and is obligated to pay
contingent payments of approximately $304 thousand and $122 thousand in fiscal
years 2009 and 2010, respectively.
4.
Equipment and Improvements
Equipment
and improvements, net consisted of the following:
|
|
|
As
of September 30
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Furniture
and fixtures
|
|
$
|
590
|
|
|
$
|
342
|
|
|
Purchased
software
|
|
|
551
|
|
|
|
362
|
|
|
Computers
and peripherals
|
|
|
1,527
|
|
|
|
951
|
|
|
Leasehold
improvements
|
|
|
375
|
|
|
|
44
|
|
|
|
|
|
3,043
|
|
|
|
1,699
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
1,280
|
|
|
|
738
|
|
|
|
|
$
|
1,763
|
|
|
$
|
961
|
|
Included
above are assets acquired under capitalized leases of $511 thousand and $338
thousand as of September 30, 2008 and 2007, respectively, with accumulated
depreciation thereon of $295 thousand and $155 thousand,
respectively.
The
Company has $501 thousand and $329 thousand of net property and equipment at
September 30, 2008 and 2007, respectively, for use in its hosting
arrangements.
5.
Definite Lived Intangible Assets and Goodwill
Definite
lived intangible assets consisted of the following:
| |
|
As
of September 30, 2008
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
Net
|
|
|
|
|
Asset
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Amount
|
|
|
Intangible
assets;
|
|
|
|
|
|
|
|
|
|
|
|
Domain
and trade names
|
|
$ |
39 |
|
|
$ |
(18 |
) |
|
$ |
(13 |
) |
|
$ |
8 |
|
|
Customer
related
|
|
|
3,649 |
|
|
|
(822 |
) |
|
|
(63 |
) |
|
|
2,764 |
|
|
Acquired
software
|
|
|
362 |
|
|
|
(154 |
) |
|
|
— |
|
|
|
208 |
|
|
Total
intangible assets
|
|
$ |
4,050 |
|
|
$ |
(994 |
) |
|
$ |
(76 |
) |
|
$ |
2,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As
of September 30, 2007
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
Net
|
|
|
Intangible
assets;
|
|
Asset
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Amount
|
|
|
Domain
and trade names
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
related
|
|
$ |
39 |
|
|
$ |
(15 |
) |
|
$ |
— |
|
|
$ |
24 |
|
|
Acquired
software
|
|
|
1,764 |
|
|
|
(352 |
) |
|
|
— |
|
|
|
1,412 |
|
|
Total
intangible assets
|
|
|
95 |
|
|
|
(90 |
) |
|
|
— |
|
|
|
5 |
|
|
|
|
$ |
1,898 |
|
|
$ |
(457 |
) |
|
$ |
— |
|
|
$ |
1,441 |
|
The
aggregate amortization expense related to intangible assets for the years ended
September 30, 2008 and 2007 is as follows:
|
|
|
Total
|
|
|
Expense
Charge To
|
|
|
|
|
Amortization
|
|
|
Cost
of
|
|
|
|
|
|
|
|
Expense
|
|
|
Revenue
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30, 2008
|
|
$
|
537
|
|
|
$
|
64
|
|
|
$
|
473
|
|
|
Year
Ended September 30, 2007
|
|
$
|
159
|
|
|
$
|
33
|
|
|
$
|
126
|
|
The
estimated amortization expense for fiscal years 2009, 2010, 2011, 2012, 2013 and
thereafter is $760 thousand, $731 thousand, $665 thousand, $589 thousand, $231
thousand and $4 thousand, respectively.
Goodwill
consisted of the following:
|
|
|
As
of September 30, 2008
|
|
|
As
of September 30, 2007
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
Asset
|
|
|
|
Impairment
|
|
|
Amount
|
|
|
Asset
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
20,477
|
|
|
$
|
(9,752
|
)
|
|
$
|
10,725
|
|
|
$
|
14,426
|
|
|
$
|
—
|
|
|
$
|
14,426
|
|
The
Company recognized goodwill impairment of $9.8 million as of September 30, 2008
as more fully described in Note 2. For the goodwill impairment
evaluation, the Company is required to perform a second step of the goodwill
impairment test, used to measure the amount of impairment loss that compares the
implied fair value of our one reporting unit goodwill with the carrying amount
of that goodwill. The Company expects to complete this analysis and
record the allocation of the impairment loss its first quarter of fiscal
2009.
Before
impairment, goodwill increased $6.1 million and $8 million in the years ended
September 30, 2008 and 2007. The increase in the year ended September
30, 2008 included $4.7 million as a result of the acquisitions of Tenth Floor
and Indigio and $1.4 million due to contingent consideration earned under
acquisition agreements. The increase in the year ended September 30, 2007
included $7.6 million as a result of the acquisitions of OW and PM and $455
thousand due to contingent consideration earned under acquisition
agreements.
6. Accrued
Liabilities
Accrued
liabilities consisted of the following:
|
|
|
As
of September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$
|
552
|
|
|
$
|
509
|
|
|
Subcontractors
|
|
|
6
|
|
|
|
90
|
|
|
Deferred
rent
|
|
|
467
|
|
|
|
65
|
|
|
Contingent
acquisition
|
|
|
327
|
|
|
|
222
|
|
|
Professional
fees
|
|
|
184
|
|
|
|
134
|
|
|
Other
|
|
|
324
|
|
|
|
246
|
|
|
|
|
$
|
1,860
|
|
|
$
|
1,266
|
|
7. Indebtedness
In 2006,
the Company entered into an agreement, as amended, with an underwriter to
execute a private placement of $2.8 million of senior secured notes payable and
related security agreement (the “Senior Notes”) and to underwrite an initial
public offering of the Company’s common stock. The Senior Notes were
collateralized by all assets of the Company. The Senior Notes were
subordinated to other creditors at issuance; however, those debts were fully
paid by the Company as of July 1, 2006. The principal amount of the Senior Notes
was payable in full at the closing date of an initial public offering of the
Company’s securities (the “Maturity Date”). In July 2007, the Company
repaid the Senior Notes in their entirety after the initial public offering was
completed.
In
connection with the issuance of the Senior Notes, the Company issued 280,000
warrants to the note holders (the “Debt Warrants”) and 112,000 warrants to the
underwriter for services rendered in connection with the private placement (the
“Underwriter’s Debt Warrants”). These warrants are exercisable into shares of
the Company’s common stock. The Debt Warrants are exercisable at $0.001 per
share at any time within five years from the date of grant. The Underwriter’s
Debt Warrants are exercisable at any time within five years from the grant date
provided, however, that no such exercise shall take place prior to the earlier
of the date of an initial public offering or April 21, 2008. The Underwriter’s
Debt Warrants are exercisable at $5.00 per share. As part of the Senior Notes,
the Company’s investment banker received $280 thousand in fees which are
recorded as deferred financing fees and were amortized over the one-year term of
the Senior Notes.
Interest
expense related to this debt, including amortization of the deferred financing
fees, was $0 thousand and $858 thousand for the years ended September 30, 2008
and 2007, respectively.
Credit
Facility Borrowings
In
September 2008, the Company entered into a loan and security agreement with
Silicon Valley Bank that provides for a revolving working capital line of credit
for up to the lesser of (a) $1.25 million and (b) 80% of eligible
accounts receivable, subject to specified adjustments. Borrowings under the
working capital line of credit are due in September 2009. Borrowings under the
working capital line bear interest at a rate per annum that is 1.0% above the
prime rate. The prime rate was 5.0% per annum at September 30, 2008. All of
the borrowings under the loan and security agreement are
secured
by all of our accounts receivable, investment property and financial assets. As
of September 30, 2008, the Company had a balance of $1 million drawn on the
working capital line of credit which was repaid in full in October
2008.
In
December 2008, the Company amended its loan and security agreement with Silicon
Valley Bank. The amendment provides for an increase in the revolving
working capital line of credit for up to the lesser of
(a) $3.0 million and (b) 80% of eligible accounts receivable,
subject to specified adjustments. Borrowings under the amended
working capital line bear interest at a rate per annum that is 2.0% above the
prime rate with a minimum interest rate of 8.0%. All of the
borrowings under the loan and security agreement are secured by all assets of
the Company. As of December 29, 2008 there were no amounts
outstanding on the working capital line of credit.
Capital Lease
Obligations
|
|
|
As
of September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
$
|
244
|
|
|
$
|
222
|
|
|
Less: Current
portion
|
|
|
(105
|
)
|
|
|
(76
|
)
|
|
Capital
lease obligations
|
|
$
|
139
|
|
|
$
|
146
|
|
As of
September 30, 2008, the Company had remaining the following minimum lease
payments under capitalized lease obligations:
|
Year Ending September
30,
|
|
|
|
|
2009
|
|
$
|
130
|
|
|
2010
|
|
|
90
|
|
|
2011
|
|
|
55
|
|
|
2012
|
|
|
12
|
|
|
2013
|
|
|
—
|
|
|
Totals
|
|
|
287
|
|
|
Less
interest at a weighted average of 14.8%
|
|
|
43
|
|
|
Total
capital lease obligations
|
|
$
|
244
|
|
8. Commitments and
Contingencies
Guarantees
and Indemnifications
Certain
software licenses granted by the Company contain provisions that indemnify
licensees from damages and costs resulting from claims alleging that the
Company’s software infringes the intellectual property rights of a third party.
The Company has indemnification provisions in its articles of incorporation
whereby no director or officer will be liable to the Company or its shareholders
for monetary damages for breach of certain fiduciary duties as a director or
officer. The Company has received no requests for indemnification under these
provisions, and has not been required to make material payments pursuant to
these provisions. Accordingly, the Company has not recorded a liability related
to these indemnification provisions.
Litigation
The
Company is subject to ordinary routine litigation and claims incidental to its
business. The Company monitors and assesses the merits and risks of pending
legal proceedings. While the results of litigation and claims cannot be
predicted with certainty, based upon its current assessment, the Company
believes that the final outcome of any existing legal proceeding will not have a
materially adverse effect, individually or in the aggregate, on its consolidated
results of operations or financial condition.
Operating
Lease Commitments
The
Company maintains its executive offices in Woburn, Massachusetts and operating
offices in several locations throughout the United States and India.
Future minimum rental commitments under non-cancelable operating leases
with initial or remaining terms in excess of one year at September 30, 2008 were
as follows:
|
Year Ending September
30,
|
|
|
|
|
2009
|
|
$
|
1,238
|
|
|
2010
|
|
|
1,114
|
|
|
2011
|
|
|
998
|
|
|
2012
|
|
|
640
|
|
|
2013
|
|
|
334
|
|
|
2014
and beyond
|
|
|
211
|
|
|
Total
|
|
$
|
4,535
|
|
Rent
expense for the years ended September 30, 2008 and 2007 was approximately
$1.2 million and $730 thousand, respectively, exclusive of sublease income of
$112 thousand and $71 thousand for the years ended September 30, 2008 and 2007,
respectively. In January 2007, the Company entered into an
arrangement to sub lease certain excess office space. The terms of
the sublease are substantially consistent with the terms of the original
lease. Prior subleases ceased when the related leases
expired.
Other
Commitments
On
October 1, 2005, the Company entered into a Business Combination Services
Agreement with Joseph Gunnar & Co., LLC (“Gunnar”), pursuant to which Gunnar
provides Bridgeline with certain advisory services concerning potential
acquisitions and transactions. The term of the agreement is for one year with
automatic one-year renewals until either party elects not to renew and provides
90 days’ written notice prior to the commencement of the next renewal period or
after the consummation of two business combinations during any term. During the
term and any renewal periods, the Company is required to pay cash advances
against success fees in the initial amount of $7 thousand per month, which
amount increased to $10 per month in May 2006, and will increase to $15 thousand
per month upon a public stock offering. As compensation for its services, the
Company is obligated to pay Gunnar, at the closing of a business combination
(i.e., a merger,
acquisition, sale or joint venture), a success fee equal to six percent of the
total value of all cash, securities or other property paid in connection with
the transaction. The success fee for each business combination consummated
during the initial term or a renewal period is a minimum of $125 thousand and a
maximum of $375 thousand, net of the cash advances paid to Gunnar during the
applicable period. Success fees, less amounts paid in advance, are included in
the total purchase price of the related acquisition. Amounts paid in advance are
expensed as paid. Effective August 31, 2007, the Company renegotiated
the agreement with Gunnar and as a result no longer pays a monthly amount and
all fees relating to the success of any business combination is payable only
upon the consummation of the deal.
The
Company frequently warrants that the technology solutions it develops for its
clients will operate in accordance with the project specifications without
defects for a specified warranty period, subject to certain limitations that the
Company believes are standard in the industry. In the event that defects are
discovered during the warranty period, and none of the limitations apply, the
Company is obligated to remedy the defects until the solution that the Company
provided operates within the project specifications. The Company is not
typically obligated by contract to provide its clients with any refunds of the
fees they have paid, although a small number of its contracts provide for the
payment of liquidated damages upon default. The Company has purchased insurance
policies covering professional errors and omissions, property damage and general
liability that reduce its monetary exposure for warranty-related claims and
enable it to recover a portion of any future amounts paid. The Company typically
provides in its contracts for testing and client acceptance procedures that are
designed to mitigate the likelihood of warranty-related claims, although there
can be no assurance that such procedures will be effective for each project. The
Company has never paid any material amounts with respect to the warranties for
its solutions. The Company sometimes commits unanticipated levels of effort to
projects to remedy defects covered by its warranties. The Company’s estimate of
its exposure related to warranties on contracts is immaterial as of
September 30, 2008 and 2007.
9. Shareholder’s
Equity
The
Company completed an initial public offering in June 2007. In
addition to the shares in the market, the Company has granted common stock,
common stock warrants, and common stock option awards (the “Equity Awards”) to
employees, consultants, advisors and debt holders of the Company and to former
owners and employees of acquired companies that become employees of the Company.
The following is a summary of the common stock reserved for issuance for stock
option and warrant activity:
Common
Stock Warrants
During
2001 through 2004, the Company issued to certain investment advisors warrants to
purchase 160,542 shares of common stock for services rendered in connection with
private placement sales of common stock with aggregate
proceeds
of approximately $4.7 million. The warrants are exercisable at $3.75 and $4.68
per share at any time within five years from the grant date. In
connection with a December 2004 acquisition, the Company issued 72,527 warrants
to its investment advisor for services rendered in connection with the
acquisition. The warrants are exercisable at $4.68 per share at any time
within five years from the grant date. The Company valued the warrants at $269
thousand using the Model and assumptions as described in Note 2, which the
Company recorded as a direct cost of the acquisition.
In March
2005, the Company issued 3,200 warrants in connection with a $500 thousand
financing agreement. The warrants are exercisable at $4.68 per share at any time
within five years from the date of grant. The Company valued the warrants at $8
thousand using the Model and assumptions as described in Note 2, which the
Company charged to deferred financing fees and amortized the cost over the
expected life of the agreement. The fees were fully amortized when the financing
agreement was terminated in 2006.
In
accordance with the terms of the warrant agreements, any liquidity event,
including an initial public offering, would result in the conversion of the
warrants per a prescribed formula to Bridgeline common stock. In
connection with the Company’s successful initial public offering, the above
referenced warrants were converted to common stock.
The Debt
Warrants issued in connection with the Senior Notes described in Note 7 are
exercisable at $0.001 per share at any time within five years from the date of
grant. As of September 30, 2008, 235,000 Debt Warrants have been exercised by
Senior Note holders. The Underwriter’s Debt Warrants issued in connection with
the Senior Notes described in Note 7 are exercisable at any time within five
years from the grant date provided, however, that no such exercise shall take
place prior to the earlier of the date of an initial public offering or April
21, 2008. The Underwriter’s Debt Warrants are exercisable at $5.00. The Company
valued the Debt Warrants at $531 thousand and the Underwriter’s Debt Warrants at
$115 thousand using the Model and assumptions as described in Note 2. The value
of the Debt Warrants was recorded as a discount on the Senior Notes and was
amortized over the one year term of the Senior Notes. The value of the
Underwriter’s Debt Warrants was charged to deferred financing costs and was
amortized over the one year term of the Senior Notes.
In July
2007, the Company issued 150,000 warrants in connection with the successful
initial public offering (the IPO Warrants). The Company had agreed
with the underwriters that such IPO Warrants would be issued in connection with
the fees due to the underwriters for the successful transaction. Each
IPO Warrant has an exercise price of $7.50 and can be exercised at any time from
January 2008 through July 2012. The Company recorded the grant date
fair value of these IPO Warrants of $400 thousand, using the Model and
assumptions as described in Note 2, directly to additional paid in capital as
part of the direct incremental fees associated with the initial public
offering. At September 30, 2008, the Company has 307,000 warrants
outstanding.
Subsequent
to the initial issuance, the Company amended the terms of the Debt Warrants, the
Underwriter’s Debt Warrants and IPO Warrants described above to eliminate a
provision included in error during the drafting of the
documents. This provision would have permitted the holders of the
warrants to redeem the warrants in the event that the Company’s registration
during the terms of each warrant became ineffective. The inclusion of
this provision would have required the Company to reflect the outstanding
warrants as liabilities rather than as equity, as this provision could be
interpreted as a put option with a cash settlement. The Company and
the holders of the warrants intended for the instruments to only be settled in
equity and thus the terms were amended accordingly.
2000
Stock Incentive Plan
During
2000, the Company adopted the 2000 Stock Incentive Plan (the “Plan”) and
reserved 1.0 million shares of common stock for issuance thereunder. On
June 24, 2005 the Board of Directors increased the reserve for common stock
issued under the Plan to 1.2 million shares. The Plan authorized the award of
incentive stock options, non-statutory stock options, restricted stock,
unrestricted stock, performance shares, stock appreciation rights and any
combination thereof to employees, officers, directors, consultants, independent
contractors and advisors of the Company. During 2006, the Company amended and
restated the Plan to conform to current tax laws and to increase the number of
common shares reserved for issuance under the plan to 1.4 million and in April
2008, the Company amended and restated the Plan to increase the number of common
shares reserved for issuance under the plan to 2.0 million. Options
granted under the Plan may be granted with contractual lives of up to ten years.
There were 271,310 options reserved for issuance under the Plan as of September
30, 2008.
2001
Lead Dog Stock Option Plan
In
connection with the Company’s merger with Lead Dog in February 2002, the Company
assumed Lead Dog’s 2001 Stock Option Plan (the “Lead Dog Plan”). Options under
the Lead Dog Plan may be granted for periods of up to ten years and at prices no
less than the fair market value of the shares on the date of grant. Under the
terms of the Agreement and Plan of Merger with Lead Dog, 98,731 options of the
Lead Dog Plan were reserved for issuance to former Lead Dog employees that
remained with the Company for one year subsequent to the
merger.
A summary
of combined option and warrant activity is as follows:
|
|
|
Stock
Options
|
|
|
Stock
Warrants
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2006
|
|
|
929,587
|
|
|
|
3.086
|
|
|
|
578,269
|
|
|
$
|
2.653
|
|
|
Granted
(1)
|
|
|
267,778
|
|
|
$
|
4.120
|
|
|
|
150,000
|
|
|
|
7.500
|
|
|
Exercised
(2)
|
|
|
(27,831
|
)
|
|
|
0.940
|
|
|
|
(59,724
|
)
|
|
$
|
0.554
|
|
|
Cancelled
or expired
|
|
|
(91,703
|
)
|
|
$
|
3.710
|
|
|
|
(201,545
|
)
|
|
|
4.504
|
|
|
Outstanding,
September 30, 2007
|
|
|
1,077,831
|
|
|
$
|
3.430
|
|
|
|
467,000
|
|
|
$
|
3.610
|
|
|
Granted
(3)
|
|
|
823,300
|
|
|
$
|
1.850
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
(4)
|
|
|
(6,667
|
)
|
|
|
0.003
|
|
|
|
(160,000
|
)
|
|
$
|
0.001
|
|
|
Cancelled
or expired
|
|
|
(167,773
|
)
|
|
$
|
3.680
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding,
September 30, 2008
|
|
|
1,728,691
|
|
|
$
|
3.060
|
|
|
|
307,000
|
|
|
$
|
5.49
|
|
(1) The
weighted average grant-date fair value of options granted during the fiscal year
ended 2007 was $1.50.
(2) The
intrinsic value of options and warrants exercised during the year ended
September 30, 2007 was $93 thousand and $122 thousand, respectively. Warrants
exercised during the year ended September 30, 2007 had an intrinsic value of
$3.61 per share
(3) The
weighted average grant-date fair value of options granted during the fiscal year
ended 2008 was $1.85.
(4) The
intrinsic value of options and warrants exercised during the year ended
September 30, 2008 was $24 thousand and $558 thousand, respectively. Options
exercised during the year ended September 30, 2008 had an intrinsic value of
$3.59 per share. Warrants exercised during the year ended September
30, 2008 had an intrinsic value of $3.49 per share
A summary
of options outstanding and options exercisable at September 30,
2008:
| |
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
| |
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Number
of
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Number
of
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Options
|
|
|
Intrinsic
|
|
|
Price
|
|
|
Options
|
|
|
Life
in Years
|
|
|
Value
|
|
|
Exercisable
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
0.003
|
|
|
|
6,667
|
|
|
|
4.00
|
|
|
$
|
8,514
|
|
|
|
6,667
|
|
|
$
|
8,514
|
|
| $ |
0.357
|
|
|
|
3,220
|
|
|
|
3.41
|
|
|
$
|
2,971
|
|
|
|
3,220
|
|
|
$
|
2,971
|
|
| $ |
1.072
|
|
|
|
29,675
|
|
|
|
3.41
|
|
|
$
|
6,184
|
|
|
|
29,675
|
|
|
$
|
6,184
|
|
| $ |
1.200
|
|
|
|
43,111
|
|
|
|
6.21
|
|
|
$
|
3,449
|
|
|
|
43,111
|
|
|
$
|
3,449
|
|
| $ |
1.760
|
|
|
|
313,000
|
|
|
|
9.89
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
| $ |
2.200
|
|
|
|
15,000
|
|
|
|
9.82
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
| $ |
2.400
|
|
|
|
42,000
|
|
|
|
9.76
|
|
|
$
|
—
|
|
|
|
42,000
|
|
|
$
|
—
|
|
| $ |
2.500
|
|
|
|
104,500
|
|
|
|
9.53
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
| $ |
3.000
|
|
|
|
254,972
|
|
|
|
4.55
|
|
|
$
|
—
|
|
|
|
254,972
|
|
|
$
|
—
|
|
| $ |
3.220
|
|
|
|
6,100
|
|
|
|
9.26
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
| $ |
3.590
|
|
|
|
130,000
|
|
|
|
9.21
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
| $ |
3.690
|
|
|
|
155,000
|
|
|
|
9.08
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
| $ |
3.750
|
|
|
|
517,546
|
|
|
|
7.24
|
|
|
$
|
—
|
|
|
|
431,373
|
|
|
$
|
—
|
|
| $ |
3.920
|
|
|
|
32,400
|
|
|
|
8.92
|
|
|
$
|
—
|
|
|
|
32,400
|
|
|
$
|
—
|
|
| $ |
4.600
|
|
|
|
33,000
|
|
|
|
8.78
|
|
|
$
|
—
|
|
|
|
12,334
|
|
|
$
|
—
|
|
| $ |
4.900
|
|
|
|
42,500
|
|
|
|
8.77
|
|
|
$
|
—
|
|
|
|
42,500
|
|
|
$
|
—
|
|
|
|
|
|
|
|
1,728,691
|
|
|
|
|
|
|
|
|
|
|
|
898,252
|
|
|
|
|
|
A summary
of the status of Bridgeline’s nonvested shares is presented below.
|
Nonvested
Shares
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair
Value
|
| Nonvested
at September 30, 2006 |
|
379,131 |
|
$
2.11 |
|
Granted
|
|
267,778 |
|
1.50 |
|
Vested
|
|
(295,048) |
|
1.61 |
|
Forfeited
|
|
(21,981) |
|
1.46 |
|
Nonvested
at September 30, 2007
|
|
329,880
|
|
$
2.26
|
|
Granted
|
|
823,300
|
|
1.85
|
|
Vested
|
|
(216,500)
|
|
3.53
|
|
Forfeited
|
|
(106,241)
|
|
3.63
|
|
Nonvested
at September 30, 2008
|
|
830,439
|
|
$
2.80
|
As of
September 30, 2008 there was $754 thousand of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized over a weighted average of
2.4
years.
The total fair value of shares vested during the years ended September 30, 2008
and 2007 were $764 thousand and
$475 thousand, respectively of which options with a value $224
thousand and
$309 thousand have been subsequently cancelled after vesting in years ended
September 30, 2008 and 2007, respectively.
The
following table illustrates the assumptions used by the Company in the
application of the Model to calculate the compensation expense in accordance
with SFAS 123 for stock options granted to employees and
directors:
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
Expected
|
|
Option
|
|
|
|
|
of
Common
|
|
Stock
|
|
Risk
Free
|
|
Dividend
|
|
Option
Life
|
|
Exercise
|
|
|
|
|
Stock
|
|
Volatility
|
|
Rate
of Return
|
|
Rate
|
|
in
Years
|
|
Prices
|
|
|
Year
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
1.04 - $1.88
|
|
54%
- 70%
|
|
2.72%
- 4.04%
|
|
0%
|
|
3.0
- 10
|
|
$
1.76 - $3.69
|
|
|
2007
|
|
$
0.61 - $2.92
|
|
72%
|
|
4.70%
- 5.22%
|
|
0%
|
|
3.0
- 10
|
|
$
3.75 - $4.90
|
|
In
October 2008, the Board of Directors approved the modification of incentive
option grants totaling approximately 1.6 million shares. The effect
of the modification was to adjust the exercise price of the applicable options
to the fair value of the underlying common stock on the date of
modification. In addition, the vesting period on the applicable
options was reset to the standard three year term set forth under the Company’s
incentive stock option plan. The Company estimated the fair value of
the stock option modifications using the Model and will record additional
stock-based compensation of approximately $181 thousand over the three year
vesting period.
10.
Income Taxes
The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The sources and tax effects of the differences are as
follows:
|
|
|
Year
Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Income
tax benefit at the federal statutory rate of 34%
|
|
$
|
(3,493
|
)
|
|
$
|
(645
|
)
|
|
Permanent
differences, net
|
|
|
3,395
|
|
|
|
335
|
|
|
State
income benefit, net of federal benefit
|
|
|
(23
|
)
|
|
|
(106
|
)
|
|
Change
in valuation allowance attributable to operations
|
|
|
195
|
|
|
|
355
|
|
|
Other
|
|
|
(74
|
)
|
|
|
61
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of September 30, 2008, the Company has net operating loss carryforwards (“NOLs”)
of approximately $4.8 million for federal purposes and $3.2 million for state
purposes, which will be available to offset future taxable income. Approximately
$1.2 million of the Company’s net operating losses is attributable to acquired
entities. These net operating losses were fully reserved for at the respective
acquisition dates. In the event the Company realizes these assets in the future,
the benefit will be recorded as a reduction of goodwill. If not used, the
federal carryforwards will expire between 2020 and 2027 and the state
carryforwards will expire between 2009 and 2027.
The
Company’s income tax provision was computed based on the federal statutory rate
and average state statutory rates, net of the related federal
benefit.
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
|
|
As
of September 30,
|
|
|
Deferred
tax assets:
|
|
2008
|
|
|
2007
|
|
|
Short-term:
|
|
|
|
|
|
|
|
Contract
loss reserve
|
|
$
|
45
|
|
|
$
|
1
|
|
|
Bad
debt reserve
|
|
|
145
|
|
|
|
—
|
|
|
Defferred
revenue
|
|
|
403 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
|
1,907
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(459
|
)
|
|
|
(567
|
)
|
|
Depreciation
|
|
|
(171
|
)
|
|
|
(140
|
)
|
|
|
|
|
1,870
|
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
1,870
|
|
|
|
1,192
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
For the
year ended September 30, 2008 the valuation allowance for deferred tax assets
increased $678 thousand which was mainly due to increases in deferred revenue
and certain allowances and reserves. For the year ended September 30,
2007 the valuation allowance for deferred tax assets decreased $337 thousand
which was mainly due to the acquisitions of Objectware and Purple Monkey offset
by the operating loss incurred. The Company has NOLs and other
deferred tax benefits that are available to offset future taxable income. A
valuation allowance is established if it is more likely than not that all or a
portion of the deferred tax asset will not be realized. Accordingly, the Company
has established a full valuation allowance against its net deferred tax asset at
September 30, 2008 and 2007.
In
January 2003, the Company established Bridgeline Software Pvt. Ltd in Bangalore
India under the Software Technology Parks of India law. This law establishes a
tax holiday for the first ten years of operations; therefore the Company has not
incurred any foreign taxes. To date, the foreign taxes not incurred as a result
of this tax holiday have not been significant.
Undistributed
earnings of the Company’s foreign subsidiary amounted to approximately $517
thousand and $280 thousand at September 30, 2008 and 2007, respectively. These
earnings are considered to be indefinitely reinvested; accordingly, no provision
for US federal and state income taxes has been provided thereon. Upon
repatriation of those earnings, in the form of dividends or otherwise, the
Company would be subject to both US income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the applicable foreign tax
authority. Determination of the amount of unrecognized deferred US income tax
liability is not material and detailed calculations have not been performed. As
of September 30, 2008, there would be minimal withholding taxes upon remittance
of all previously unremitted earnings.
11.
Related Party Transactions
In
connection with the acquisition of Purple Monkey Studios, Inc., the Company
entered into a short-term lease with Purple Monkey Realty LLC. The
owners of Purple Monkey Realty LLC are also employees of the
Company. The Company relocated to a new space in September 2008 after
the terms of the initial lease expired. For the year ended September
30, 2008, the Company paid $137 thousand under this agreement.
In April
2007, we issued secured promissory notes to our Chief Executive Officer and a
member of the Board of Directors aggregating $200 thousand. The notes
bore interest at a rate of 15% per annum payable, along with the outstanding
principal on the notes, on the closing of the initial public offering of
securities. The Company paid $6 thousand in interest expense and
repaid the notes in their entirety in July 2007 upon the completion of the
initial public offering.
Item
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM
8A(T). CONTROLS AND PROCEDURES
Management’s
Report on Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our President and Chief Executive Officer (Principal
Executive Officer) and our Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer), as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are
designed to do, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
As of
September 30, 2008, the end of our fiscal year covered by this report, we
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on the foregoing, we concluded
that our disclosure controls and procedures except as described below were
effective as of the end of the period covered by this annual
report.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Responsibility, estimates and judgments by
management are required to assess the expected benefits and related costs of
control procedures. The objectives of internal control include providing
management with reasonable, but not absolute, assurance that assets are
safeguarded against loss from unauthorized use or disposition, and that
transactions are executed in accordance with management’s authorization and
recorded properly to permit the preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United
States. Our management assessed the effectiveness of our internal control over
financial reporting as of September 30, 2008. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework. Our management has concluded that, except as described below,
as of September 30, 2008, our internal control over financial reporting is
effective in providing reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with US generally accepted accounting principles. Our
management reviewed the results of their assessment with our Board of
Directors.
In
connection with its audit of our financial statements, our external auditors,
UHY LLP, advised us that they were concerned that during the years ended
September 30, 2008 and 2007, our accounting resources did not include enough
people with the detailed knowledge, experience and training in the selection and
application of certain accounting principles generally accepted in the United
States of America (GAAP) to meet our financial reporting needs. This control
deficiency contributed to material weaknesses in internal control with respect
to accounting for revenue recognition and equity. A “material weakness” is a
control deficiency or combination of control deficiencies that results in more
than a remote likelihood that a material misstatement in the financial
statements or related disclosures will not be prevented or
detected.
During
fiscal 2007 and 2008, we created or enhanced several new positions in our
Company, including our controller and a vice-president level, with specific
responsibilities for external financial reporting, internal control, revenue
recognition and purchase accounting. We believe that the addition of
these accounting resources will address the material weakness noted
above. We estimate that the annual cost of the new positions referred
to above will be between $300 thousand and $350 thousand. In
addition, we expect to incur significant additional costs in the future. While
we expect to complete the process of bringing our internal control documentation
into compliance with the Sarbanes-Oxley Act (SOX) Section 404 as quickly as
possible, we cannot at this time estimate how long it will take to complete the
process or its ultimate cost. We expect such costs to be
significant. During the fiscal 2008, we continued the implementation
of and enhancements to a new financial reporting system that is expected to
improve the reporting process by eliminating redundant
spreadsheets.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
Inherent
limitations on effectiveness of controls
Internal
control over financial reporting has inherent limitations which include but is
not limited to the use of independent professionals for advice and guidance,
interpretation of existing and/or changing rules and principles, segregation of
management duties, scale of organization, and personnel factors. Internal
control over financial reporting is a process which
involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements on a timely basis, however these
inherent limitations are known features of the financial
reporting process and it is possible to design into the process safeguards to
reduce, though not eliminate, this risk. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Changes in
Internal Control over Financial Reporting
There
have been no significant changes in our internal controls over financial
reporting that occurred during the year ended September 30, 2008 that have
materially or are reasonably likely to materially affect, our internal controls
over financial reporting.
ITEM
8B: OTHER INFORMATION
None.
PART
III
Item
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
CORPORATE GOVERANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The
following table sets forth information regarding our directors and executive
officers:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Thomas
Massie
|
|
47
|
|
Chairman,
Chief Executive Officer and President
|
|
|
|
|
|
|
|
John
Cavalier
|
|
66
|
|
Director(1)(2)(3)(4)
|
|
|
|
|
|
|
|
William
Coldrick
|
|
66
|
|
Director
(1)(2)(3)(4)
|
|
|
|
|
|
|
|
Kenneth
Galaznik
|
|
57
|
|
Director
(1)(4)
|
|
|
|
|
|
|
|
Robert
Hegarty
|
|
45
|
|
Director(2)(3)(4)
|
|
|
|
|
|
|
|
Gary
Cebula
|
|
49
|
|
Executive
Vice President, Treasurer, Corporate Secretary and Chief Financial
Officer
|
|
|
|
|
|
|
|
Brett
Zucker
|
|
37
|
|
Executive
Vice President and Chief Technical Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Member
of the Audit Committee.
|
|
(2)
|
Member
of the Compensation Committee.
|
|
(3)
|
Member
of the Nominating and Governance Committee.
|
|
(4)
|
Independent
director.
|
The
additional information required by this Item 9 of Form 10-KSB is hereby
incorporated by reference to the information in our definitive proxy statement
to be filed within 120 days after the close of our fiscal year.
Item
10. EXECUTIVE COMPENSATION
The
information required by this Item 10 of Form 10-KSB is hereby incorporated by
reference to the information in our definitive proxy statement to be filed
within 120 days after the close of our fiscal year.
Item
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS.
We
maintain a number of equity compensation plans for employees, officers,
directors and other entities and individuals whose efforts contribute to our
success. The table below sets forth certain information as of our fiscal year
ended September 30, 2008 regarding the shares of our common stock available for
grant or granted under our equity compensation plans.
|
Plan
category
|
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
(a)
|
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(a)/(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
1,728,690
|
|
|
3.06
|
|
|
271,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders (1)
|
|
|
262,000
|
|
|
6.43
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,990,690
|
|
|
3.50
|
|
|
271,310
|
|
(1) In
April 2006, the Company issued 112,000 warrants to the underwriter for services
rendered in connection with the private placement (the “Underwriter’s Debt
Warrants”). These warrants are exercisable into shares of the Company’s common
stock. The Underwriter’s Debt Warrants are exercisable at any time
within five years from the grant date provided, however, that no such exercise
shall take place prior to the July 5, 2007. The Underwriter’s Debt Warrants are
exercisable at $5.00 per share. In July 2007, the Company issued
150,000 warrants in connection with the successful initial public offering (the
“IPO Warrants”). The Company had agreed with the underwriters that
such IPO Warrants would be issued in connection with the fees due to the
underwriters for the successful transaction. Each IPO Warrant has an
exercise price of $7.50 and can be exercised at any time from January 2008
through July 2012. The Company recorded the grant date fair value of
these IPO Warrants of $400 thousand, using the Model and assumptions as
described in Note 2, directly to additional paid in capital as part of the
direct incremental fees associated with the initial public
offering. At September 30, 2008, the Company has 307,000 warrants
outstanding.
The
additional information required by this Item 11 of Form 10-KSB is hereby
incorporated by reference to the information in our definitive proxy statement
to be filed within 120 days after the close of our fiscal year.
Item
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND DIRECTORS
INDEPENDENCE.
The
information required by this Item 12 of Form 10-KSB is hereby incorporated by
reference to the information in our definitive proxy statement to be filed
within 120 days after the close of our fiscal year.
Item 13.
EXHIBITS
|
|
2.1
|
|
|
New
Tilt, Inc. Acquisition Agreement (incorporated by reference to Exhibit 2.1
to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
2.2
|
|
|
Interactive
Applications, Inc. Acquisition Agreement (incorporated by reference to
Exhibit 2.2 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
2.3
|
|
|
Objectware,
Inc. Acquisition Agreement (incorporated by reference to Exhibit 2.3 to
our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
2.4
|
|
|
Lead
Dog Digital, Inc. Acquisition Agreement (incorporated by reference to
Exhibit 2.4 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
2.5
|
|
|
Streamline
Communications, Inc. Acquisition Agreement (incorporated by reference to
Exhibit 2.5 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
2.6
|
|
|
Purple
Monkey Studios, Inc. Acquisition Agreement (incorporated by reference to
Exhibit 2.1 to our Current Report on Form 8-K filed on September 5,
2007)
|
|
|
|
2.7
|
|
|
Agreement
and Plan of Merger, dated as of January 31, 2008, by and among Bridgeline
Software, Inc., Tenth Floor, Inc., Austin J. Mulhern, Anthony G.
Pietrocola, P. Scott Weiss and Matthew D. Glaze (incorporated by reference
to Exhibit 2.1 to our Current Report on Form 8-K filed on February 1,
2008)
|
|
|
|
2.8
|
|
|
Agreement
and Plan of Merger, dated as of July 1, 2008, by and among Bridgeline
Software, Inc., Indigio Group, Inc., Timothy Higgins, Michael Higgins,
Jeff D. Higgins, William Sedgwick, Sage Realty Group, LLC, Michael Mark,
Lawrence O. Brown, Bryan Schutjer, Richard Ganley, Timothy Watson, Micah
Baldwin, Michael Roy, Christine Spencer, Michael Merkulovich, James
Nelson, Jaime Pabon, George Kassabgi and James Conrad (incorporated by
reference to Exhibit 2.1 to our Current Report on Form 8-K filed on July
2, 2008)
|
|
|
|
3.1(i)
|
|
|
Amended
and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1(ii) to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
3.1(ii)
|
|
|
Amended
and Restated By-laws (incorporated by reference to Exhibit 3.1 to our
Current Report on Form 8-K filed on October 30, 2007)
|
|
|
|
4.1
|
|
|
Specimen
Common Stock Certificate (incorporated by reference to Exhibit 4.1 to our
Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.1
|
|
|
Office
Building Lease between Sixth Road Woburn, LLC and Bridgeline Software,
Inc., dated May 5, 2005 (incorporated by reference to Exhibit 10.1 to our
Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.2
|
|
|
Office
Building Lease between 104 West 40th
Street Partners LLC and Bridgeline Software, Inc., dated November 26, 2003
(incorporated by reference to Exhibit 10.2 to our Registration Statement
on Form S-B2, File No. 333-139298)
|
|
|
|
10.3
|
|
|
Lease
between Cameron-Elmwood Realty, LLC and New Tilt, Inc. dated December 6,
2004 (incorporated by reference to Exhibit 10.6 to our Registration
Statement on Form S-B2, File No. 333-139298)
|
|
|
|
10.4
|
|
|
Office
Building Lease between Valliappa Software Technological Park Pvt. Ltd. and
Bridgeline Software Enterprises Pvt. Ltd. dated December 5, 2005
(incorporated by reference to Exhibit 10.5 to our Registration Statement
on Form S-B2, File No. 333-139298)
|
|
|
|
10.5
|
|
|
Office
Building Lease between North LaSalle L.P. and Bridgeline Software, Inc.,
dated May 27, 2008.
|
|
|
|
10.6
|
|
|
Employment
Agreement with Thomas Massie, dated October 1, 2001 (incorporated by
reference to Exhibit 10.7 to our Registration Statement on Form S-B2,
File No. 333-139298)*
|
|
|
|
10.7
|
|
|
Employment
Agreement with Gary Cebula, dated January 1, 2006 (incorporated by
reference to Exhibit 10.8 to our Registration Statement on Form S-B2,
File No. 333-139298)*
|
|
|
|
10.8
|
|
|
Employment
Agreement with Brett Zucker, dated January 1, 2006 (incorporated by
reference to Exhibit 10.9 to our Registration Statement on Form S-B2,
File No. 333-139298)*
|
|
|
|
10.9
|
|
|
Employment
Agreement with Robert Seeger, dated January 1, 2006 (incorporated by
reference to Exhibit 10.10 to our Registration Statement on Form S-B2,
File No. 333-139298)*
|
|
|
|
10.10
|
|
|
Employment
Agreement with Erez M. Katz (incorporated by reference to Exhibit 2.4 to
our Current Report on Form 8-K filed on July 11, 2007)*
|
|
|
|
10.11
|
|
|
Employment
Agreement with Russell Klitchman (incorporated by reference to Exhibit 2.2
to our Current Report on Form 8-K filed on September 5,
2007)*
|
|
|
|
10.12
|
|
|
Employment
Agreement with Steven Saraceno (incorporated by reference to Exhibit 2.3
to our Current Report on Form 8-K filed on September 5,
2007)*
|
|
|
|
10.13
|
|
|
Employment
Agreement with Anthony G. Pietrocola (incorporated by reference to Exhibit
2.2 to our Current Report on Form 8-K filed on February 1,
2008)*
|
|
|
|
10.14
|
|
|
Employment
Agreement with Timothy Higgins (incorporated by reference to Exhibit 2.2
to our Current Report on Form 8-K filed on July 2, 2008)*
|
|
|
|
10.15
|
|
|
Financing
Agreement between Sand Hill Finance, LLC and Bridgeline Software, Inc.
dated March 29, 2005 (incorporated by reference to Exhibit 10.14 to our
Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.16
|
|
|
First
Amendment to Financing Agreement between Sand Hill Finance, LLC and
Bridgeline Software, Inc. dated September 12, 2005 (incorporated by
reference to Exhibit 10.15 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.17
|
|
|
Second
Amendment to Financing Agreement between Sand Hill Finance, LLC and
Bridgeline Software, Inc. dated April 26, 2007. (incorporated by reference
to Exhibit 10.60 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.18
|
|
|
General
Security Agreement by and between Bridgeline Software, Inc. and the
investors named therein, dated as of April 21, 2006 (incorporated by
reference to Exhibit 10.20 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.19
|
|
|
Amended
and Restated General Security Agreement by and between Bridgeline
Software, Inc. and the investors named therein, dated April 3, 2007
(incorporated by reference to Exhibit 10.59 to our Registration Statement
on Form S-B2, File No. 333-139298)
|
|
|
|
10.20
|
|
|
Form
of Subscription Agreement by and between Bridgeline Software, Inc. and the
investors listed on Schedule A attached thereto (incorporated by reference
to Exhibit 10.21 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.21
|
|
|
Form
of Secured Promissory Note issued to the investors listed on Schedule A
attached thereto (incorporated by reference to Exhibit 10.22 to our
Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.22
|
|
|
Amendment
No. 1 to Secured Promissory Note filed as Exhibit 10.22, dated as of March
29, 2007 (incorporated by reference to Exhibit 10.54 to our Registration
Statement on Form S-B2, File No. 333-139298)
|
|
|
|
10.23
|
|
|
Amendment
No. 2 to Secured Promissory Note filed as Exhibit 10.22, dated as of June
20, 2007 (incorporated by reference to Exhibit 10.64 to our Registration
Statement on Form S-B2, File No. 333-139298)
|
|
|
|
10.24
|
|
|
Form
of Warrant to Purchase Common Stock of Bridgeline Software, Inc. issued to
the investors listed on Schedule A attached thereto, as amended
(incorporated by reference to Exhibit 10.23 to our Registration Statement
on Form S-B2, File No. 333-139298)
|
|
|
|
10.25
|
|
|
Agreement
between Joseph Gunnar & Co., LLC, as agent for certain Noteholders and
Bridgeline Software, Inc. dated May 15, 2007 (incorporated by reference to
Exhibit 10.61 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.26
|
|
|
Subordination
Agreement between Joseph Gunnar & Co., LLC, as agent for certain
Noteholders and Bridgeline Software, Inc. dated May 15, 2007 (incorporated
by reference to Exhibit 10.62 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.27
|
|
|
Form
of Warrant to Purchase Common Stock of Bridgeline Software, Inc. issued to
Placement Agent in April 2006 offering, as amended (incorporated by
reference to Exhibit 10.24 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.28
|
|
|
Amended
and Restated Stock Incentive Plan (incorporated by reference to Appendix B
to our Definitive Proxy Statement filed on February 25,
2008)*
|
|
|
|
10.29
|
|
|
Lead
Dog Digital, Inc. 2001 Stock Option Plan (incorporated by reference to
Exhibit 10.34 to our Registration Statement on Form S-B2,
File No. 333-139298)*
|
|
|
|
10.30
|
|
|
First
Amendment to Agreement and Plan of Merger filed as Exhibit 2.3, dated as
of March 29, 2007 (incorporated by reference to Exhibit 10.55 to our
Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.31
|
|
|
Second
Amendment to Agreement and Plan of Merger filed as Exhibit 2.3, dated June
14, 2007 (incorporated by reference to Exhibit 10.63 to our Registration
Statement on Form S-B2, File No. 333-139298)
|
|
|
|
10.32
|
|
|
Form
of Escrow Agreement by and among Bridgeline Software, Inc., Erez M. Katz,
and Arnall Golden Gregory (incorporated by reference to Exhibit 10.56 to
our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.33
|
|
|
Secured
Promissory Note issued by Bridgeline Software, Inc. to Thomas Massie for
the principal sum of $100,000 dated April 3, 2007 (incorporated by
reference to Exhibit 10.57 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.34
|
|
|
Secured
Promissory Note issued by Bridgeline Software, Inc. to William Coldrick
for the principal sum of $100,000 dated April 3, 2007 (incorporated by
reference to Exhibit 10.58 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.35
|
|
|
Form
of Warrant to Purchase Common Stock of Bridgeline Software, Inc., issued
to the underwriters (incorporated by reference to Exhibit 10.65 to our
Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.36
|
|
|
Data
Processing and Technical Services Agreement between The Bank of New York
and Bridgeline Software, Inc. dated as of October 25, 2002 (incorporated
by reference to Exhibit 10.28 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.37
|
|
|
Professional
Services Agreement between The Depository Trust & Clearing Corporation
and Bridgeline Software, Inc. dated as of January 2, 2006 (incorporated by
reference to Exhibit 10.29 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.38
|
|
|
Statement
of Work for Web Maintenance Services between Nomura Securities, Inc. and
Bridgeline Software, Inc. dated as of June 12, 2002 (incorporated by
reference to Exhibit 10.30 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
|
|
10.39
|
|
|
Master
Services Agreement between John Hancock Life Insurance Co. and Bridgeline
Software, Inc. dated as of July 1, 2004 (incorporated by reference to
Exhibit 10.32 to our Registration Statement on Form S-B2,
File No. 333-139298)
|
|
| |
10.40
|
|
|
Office
Building Lease between NHD II Point LLC and Bridgeline Software, Inc.,
dated August 7, 2008.
|
|
| |
10.41
|
|
|
First
Loan Modification Agreement between Silicon Valley Bank and Bridgeline
Software, Inc., dated December 29, 2008.
|
|
|
|
21.1
|
|
|
Subsidiaries
of the Registrant
|
|
|
|
31.1
|
|
|
CEO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
|
CFO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
|
CEO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2
|
|
|
CFO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
*
|
Management
contract or compensatory plan
|
Item
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information
required by this Item 14 of Form 10-KSB is hereby incorporated by reference to
the information in our definitive proxy statement to be filed within 120 days
after the close of our fiscal year.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
BRIDGELINE SOFTWARE,
INC.
|
|
|
a
Delaware corporation
|
|
|
|
|
|
|
By:
|
/s/ Thomas Massie
Name:
Thomas Massie
|
|
|
Title: Chief
Executive Officer and Director
|
In
accordance with the requirements of the Securities Act of 1933, as amended, this
annual report on Form 10-KSB has been signed by the following persons in the
capacities with Bridgeline Software, Inc., and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
| /s/ Thomas Massie
|
|
Chief
Executive Officer and Director
|
|
December
29, 2008
|
|
Thomas
Massie
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
| /s/ Gary
Cebula |
|
Chief
Financial Officer (Principal
|
|
December
29, 2008
|
|
Gary
Cebula
|
|
Financial
Officer)
|
|
|
|
|
|
|
|
|
| /s/ John
Cavalier |
|
Director
|
|
December
29, 2008
|
|
John
Cavalier
|
|
|
|
|
|
|
|
|
|
|
| /s/ William
Coldrick |
|
Director
|
|
December
29, 2008
|
|
William
Coldrick
|
|
|
|
|
|
|
|
|
|
|
| /s/ Kenneth
Galaznik |
|
Director
|
|
December
29, 2008
|
|
Kenneth
Galaznik
|
|
|
|
|
|
|
|
|
|
|
| /s/ Robert
Hegarty |
|
Director
|
|
December
29, 2008
|
|
Robert
Hegarty
|
|
|
|
|
Exhibit
Index
|
10.5
|
|
|
Office
Building Lease between 30 North LaSalle L.P. and Bridgeline Software,
Inc., dated May 27, 2008.
|
|
10.40
|
|
|
Office
Building Lease between NHD II Point LLC and Bridgeline Software, Inc.,
dated August 7, 2008.
|
|
10.41
|
|
|
First
Loan Modification Agreement between Silicon Valley Bank and Bridgeline
Software, Inc., dated December 29, 2008.
|
|
21.1
|
|
|
Subsidiaries
of the Registrant
|
|
23.1
|
|
|
Consent
of UHY LLP
|
|
31.1
|
|
|
CEO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
|
|
CFO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
|
|
CEO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
|
|
CFO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|