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, 2007
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
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|
(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 Act o.
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x
No o.
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 o.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x
The
issuer's revenues for its most recent fiscal year $11,200,000.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $24,367,324 based on the closing price of $3.71 of the
issuer’s common stock, par value $.001 share, as reported by NASDAQ on December
11, 2007.
As
of
December 11, 2007, there were 8,653,949 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the definitive proxy statement for our
2007 annual meeting of stockholders, which is to be filed within 120 days after
the end of the fiscal year ended September 30, 2007, 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): Yes o
No x
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 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 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®
Framework
and 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 they 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 two 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®. In
August 2007, we released the iAPPS®
framework.
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 (released in October 2007) allows non-technical users to
create,
edit, and publish content via a browser-based interface. The advanced,
easy-to-use interface will allow businesses to keep content and
promotions
fresh - whether for a public commercial site or a company intranet.
The
iAPPS®
Content Manager will handle the presentation of content based on
a
sophisticated indexing and security scheme that includes
management of
front-end access to online applications. The system will provide
a robust
library functionality to manage permissions, versions and organization
of
different content types, including multimedia files and images.
Administrators will be 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
(planned release in February 2008) will provide 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 will 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
will provide insight into areas like visitor usage, content access,
age of
content, actions taken, and event triggers, and will report on
both client
and server-side events. iAPPS® Analytics
will 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 mid 2008) 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 2008) 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.
On-Demand
(SaaS) Web Tools - OrgitectureTM
Our
Orgitecture TM
platform,
developed several years ago, provides customers with an integrated suite
of
on-demand (SaaS) Web-based tools designed to streamline Web site management
and
reduce web related development costs. Orgitecture offers the stability,
reliability and economies of scale of a subscription-based service.
Developed
on open source standards, Orgitecture facilitates the development and deployment
of Web properties. Web solutions developed on Orgitecture are modular by
design,
so customers can add functionality as their needs evolve. Every Orgitecture
Web
site is customized by our developers to meet the unique needs of our customers.
Software modules include: Web content management, survey tools,
calendaring, email newsletters, online registration, and
ecommerce.
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.
Revenue
from sales of on-demand SaaS web tools are reported as Subscriptions in
the accompanying financial statements.
Web
Application Development Services
Web
Application Development
Web
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. Web
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. Web 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
web 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 a Web 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 Web 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 Web application development services is reported as Web
Development Services in the accompanying financial statements.
Managed
Services (including Hosting)
Many
of
our customers hire us to host and manage the web 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, and government agencies.
We
have
five geographic locations in the United States with full-time professional
direct sales staffs. Our geographic locations are in the Atlanta
area, Boston area, Chicago area, New York area, and Washington DC
area.
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, web 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, and government). 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
web
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 Web 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.
Since
our
initial public offering on June 29, 2007, we have completed the following two
acquisitions:
|
·
|
In
July 2007, we acquired Objectware, Inc., an Atlanta, Georgia-based
company.
|
|
·
|
In
August 2007, we acquired Purple Monkey Studios, Inc., a Chicago,
Illinois-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 allowed 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 $791 thousand in research
and development activities for the fiscal year ended September 30, 2007,
and we
invested approximately $176 thousand in research and development activities
for
the fiscal year ended September 30, 2006. We believe the cost of
India based software developers are 70% lower than the cost of United States
based software developers.
We
employed 138 employees worldwide as of September 30,
2007. Substantially all of those employees are full time
employees.
We
primarily serve five markets that we believe have a history of investing
in
information technology enhancements and initiatives. These markets
are:
|
·
|
Foundations
and non profit organizations
|
|
·
|
Federal
and state government agencies
|
We
have
more than 355 customers of which one customer, Nomura Securities, generated
more
than 15% of revenue in the fiscal year ended September 30, 2007. No
other customer generated more than 5% of revenue during such
period.
Competition
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 the competitors in a number of ways. We believe that our
competitors generally offer their Web application development software without
directly providing Web 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.
Available
Information
This
Annual Report on Form 10-KSB, as well as our quarterly report on Form 10-Q
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).
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:
|
|
|
|
|
|
|
|
|
10
Sixth Road
Woburn,
Massachusetts 01801
|
|
9,335
square feet,
professional
office space
|
|
|
|
104
West 40thStreet
New
York, New York 10018
|
|
4,400
square feet,
professional
office space
|
|
|
|
2639
Connecticut Ave., NW
Washington,
D.C. 20008
|
|
professional
office space
|
|
|
|
71
Sona Towers, West Wing
Millers
Rd., Bangalore 560 052
|
|
professional
office space
|
|
|
|
|
|
professional
office space
|
|
|
|
11440
Commerce Park Drive,
Suite
502, Reston, VA 20191
|
|
professional
office space
|
|
|
|
Oak
Park, Illinois, 60302
|
|
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, 2007, 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, 2007
|
|
High
|
|
|
Low
|
|
| |
|
|
|
|
|
|
|
Third
Quarter
|
|
$ |
5.05
|
|
|
$ |
4.30
|
|
|
Fourth
Quarter
|
|
|
5.09
|
|
|
|
2.58
|
|
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 11, 2007,
our common stock was held by approximately 163 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, 2007. 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
Objectware
- The acquisition of Objectware, Inc. closed on July 5, 2007. At that
time, we issued 610,716 shares of our common stock to the sole stockholder
of
Objectware as partial consideration in our acquisition.
Purple
Monkey Studios, Inc.– The acquisition of Purple Monkey Studios, Inc. closed
on August 31, 2007. At that time we issued an aggregate of 476,846
shares of our common stock to the two stockholders of Purple Monkey Studios
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.
Warrants
In
the
fiscal year ended September 30, 2007, we issued 59,724 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, 2007, we issued 27,831 shares of our common
stock pursuant to the exercise of vested stock options. In the fiscal
year ended September 30, 2007, we granted options to purchase equity shares
on
the following dates and amounts:
|
Date
|
|
Number
|
|
|
Exercise
Price
|
|
| |
|
|
|
|
|
|
|
|
|
October
20, 2006
|
|
|
31,880
|
|
|
$
|
3.75
|
|
|
December
9, 2006
|
|
|
5,000
|
|
|
$
|
3.75
|
|
|
April
23, 2007
|
|
|
113,998
|
|
|
$
|
3.75
|
|
|
July
5, 2007
|
|
|
42,500
|
|
|
$
|
1.74
|
|
|
July
9, 2007
|
|
|
37,000
|
|
|
$
|
4.60
|
|
|
August
31, 2007
|
|
|
37,400
|
|
|
$
|
3.92
|
|
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 exemption provided by
Rule 701 promulgated under the Securities Act, or, for securities issued
after our initial public offering, 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.
Our
initial public offering of common stock was completed through our Registration
Statement on Form SB-2, Commission file number 333-139298, that was declared
effective by the Securities and Exchange Commission on June 28, 2007. Our
initial public offering commenced on June 29, 2007 and closed on July 5,
2007. Pursuant to our initial public offering we registered a total
of 3,000,000 shares of common stock, with an aggregate offering price of
$15,000,000. In addition, we granted the underwriters an option to
purchase an additional 450,000 shares of common stock, with an aggregate
offering price of $2,250,000. We sold a total of 3,200,000 shares of
common stock at an initial public offering price of $5.00 per share, including
200,000 shares of common stock purchased as part of the over-allotment option,
for an aggregate offering price of $16,000,000. The managing
underwriting in our initial public offering was Joseph Gunnar & Co.,
LLC.
We
received net proceeds from the offering of approximately $13.5 million,
after deducting the underwriting discount and other offering costs. Since the
closing of our initial public offering on July 5, 2007, we have used net
proceeds from our initial public offering as follows: $2.8 million to repay
outstanding debt, $4.2 million to complete the acquisitions of Objectware,
Inc.
and Purple Monkey Studios, Inc. and the remainder for working capital and other
general corporate purposes, which may include acquisitions of other
businesses.
No
offering expenses were paid directly or indirectly to any of our directors
or
officers (or their associates) or to any persons owning ten percent or more
of
any class of our equity securities or to any other affiliates
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 in our Registration Statement on Form SB-2 dated June 28, 2007
and 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, improve customer
service
and loyalty, enhance employee knowledge, and reduce 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 five vertical markets: Financial
services, life sciences, high technology, foundations, and government
agencies. We have five geographic specific locations in the United
States that have professional direct sales management in each
location. They are in the Atlanta area, Boston area, Chicago area,
New York area, and Washington DC area.
In
2007,
approximately 66% of our customer base paid Bridgeline Software a monthly
subscription fee or a monthly managed service fee. In 2007
approximately 62% of our total revenue was from existing customers demonstrating
a deep customer traction model. The majority of our revenue in
2007 was driven from our web 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® Framework
and 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 Objectware in Atlanta
and Purple Monkey Studios in Chicago. We now have a geographical
presence in five areas in the United States and expect to make additional
expansion acquisitions over the next twelve months.
The
fourth quarter of fiscal 2007 marked yet another milestone for
Bridgeline. We achieved sales of $4.1 million during the quarter, a
record quarter in sales volume. We achieved net income of $23
thousand for the quarter ended September 30, 2007. In addition, we
achieved record earnings before interest, taxes, depreciation and amortization
(“EBITDA”) and before stock compensation of $294 thousand. 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. This fourth quarter
performance helped contain our operating loss to $1.9 million in fiscal 2007
when compared to a $1.4 million loss in fiscal 2006.
There
are
a number of items that affect the comparison of fiscal 2007 to
2006. These items include:
|
·
|
We
completed the acquisition of 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 on August 31,
2007. The results for fiscal 2007 include one month of results
from this acquisition.
|
|
·
|
We
completed the acquisition of New Tilt in April 2006. The fiscal
2007 results contain a full year of results from this acquisition
as
compared to five months in fiscal
2006.
|
|
·
|
We
completed our initial public offering in June
2007.
|
|
·
|
During
fiscal 2006 and 2007, we incurred additional debt to support operations
that resulted in increased interest expense. We repaid this debt
with
proceeds from our public offering.
|
|
·
|
We
increased our research and development costs to develop our iAPPS®
Framework
product during fiscal 2007. We launched iAPPS® framework
in
August 2007 and we launched the first software module, iAPPS®
Content
Manager, in October 2007.
|
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
| |
|
2007
|
|
|
2006
|
|
|
Change
$
|
|
|
Change
%
|
|
|
Total
revenue
|
|
$ |
11,151
|
|
|
$ |
8,235
|
|
|
$ |
2,916
|
|
|
|
35%
|
|
|
Gross
profit margin
|
|
|
6,131
|
|
|
|
4,426
|
|
|
|
1,705
|
|
|
|
39%
|
|
|
Loss
from operations
|
|
|
(1,006 |
) |
|
|
(810 |
) |
|
|
(196 |
) |
|
|
24%
|
|
|
Net
loss
|
|
$ |
(1,897 |
) |
|
$ |
(1,448 |
) |
|
$ |
(449 |
) |
|
|
31%
|
|
|
EBITDA
|
|
$ |
(239 |
) |
|
$ |
(505 |
) |
|
$ |
266
|
|
|
|
53%
|
|
EBITDA
Reconciliation:
| |
|
2007
|
|
|
2006
|
|
|
Net
loss
|
|
$ |
(1,897 |
) |
|
$ |
(1,448 |
) |
|
Plus:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
924
|
|
|
|
638
|
|
|
Depreciation
|
|
|
158
|
|
|
|
119
|
|
|
Amortization
|
|
|
244
|
|
|
|
186
|
|
|
Stock
Compensation
|
|
|
332
|
|
|
|
−
|
|
|
EBITDA
|
|
$ |
(239 |
) |
|
$ |
(505 |
) |
Revenue:
Overall,
revenue increased $2.9 million, or 35%, when compared to the same period one
year earlier. Acquisitions accounted for $1.5 million of this
increase. Excluding acquisitions, sales increased $1.4 million, or
17%. 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 margins were largely unchanged at 55% of sales, compared to 54% in the
fiscal 2006. 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:
|
|
2007
|
|
|
2006
|
|
|
Change
$
|
|
|
Change
%
|
|
|
Web
development services
|
|
$ |
8,659
|
|
|
$ |
6,525
|
|
|
$ |
2,134
|
|
|
|
33%
|
|
|
Managed
services
|
|
|
2,050
|
|
|
|
1,243
|
|
|
|
807
|
|
|
|
65%
|
|
|
Subscriptions
|
|
|
442
|
|
|
|
467
|
|
|
|
(25 |
) |
|
|
(5)%
|
|
|
Total
|
|
$ |
11,151
|
|
|
$ |
8,235
|
|
|
$ |
2,916
|
|
|
|
|
|
Web
Development Services :
Revenue
from web services increased $2.1 million, a 33% improvement from fiscal
2006. Acquisitions of Objectware, Inc. and Purple Monkey Studios,
Inc. accounted for $1.2 million of the increase. Excluding these
acquisitions, revenue increased $900 thousand. Our growth came in a
number of industries and customers. First, revenue from existing
customers accounted for more than 45% of the fiscal 2007 web development
services. We achieved a record year in sales, with sales from new
customers of approximately $2.6 million in the current year. Revenue
from existing customers decreased by approximately $1.8 million when compared
to
the same period one year earlier. This decrease came from primarily
three customers, whose needs vary by year. One customer, Nomura
Securities, had the largest decrease year over year. This customer
represented 15% of our total revenues during fiscal 2007. We believe
that our business with this customer will decrease in future years, primarily
due to changes in the needs of the customer and our overall revenue
growth. Although this customer has been a significant part of our
revenue in the past, the combination of new customers and acquired customers
are
expected to be more than sufficient to replace the revenue that may be lost
from
this customer. From an industry perspective, we have continued
to see broad penetration of our services into multiple
industries. Our strongest presence is in the life sciences, financial
services, high technology and non profit industries. Of the revenue
growth from new customers, life sciences contributed $625 thousand; financial
services contributed $842 thousand; high technology contributed $533 thousand
and non profit customers contributed $214 thousand. The remaining
growth came from several other industries.
Managed
Services:
Revenue
from managed services increased $807 thousand, or 65% from the prior
year. Acquisitions accounted for $367 thousand of this
increase. Excluding acquisitions, managed services increased $440
thousand. The majority of this growth came from one
customer. During the current year, this customer’s need shifted from
web services to managed services, increasing revenues more than 75% from the
levels in the prior year. Excluding this one customer, managed
services were largely unchanged from the prior year. Several new
engagements were won during the year, the benefit of which will be seen in
fiscal 2008. The revenue from the one major customer is expected to
decrease in fiscal 2008 largely due to the customer’s needs
changing. With recent acquisitions and new engagements, we do not
believe that the potential loss of revenue from this customer will be
significant to our results in fiscal 2008.
Subscriptions:
Revenue
from subscriptions decreased slightly from the prior year level by $25 thousand,
or 5%. This decrease is largely due to the loss of five customers
during fiscal 2007, resulting in a decrease of $23 thousand when compared to
the
same period. Otherwise, revenue from subscriptions was largely unchanged from
the prior year levels.
Gross
Profit
| |
|
2007
|
|
|
2006
|
|
|
Change
$
|
|
|
Change
%
|
|
|
Web
development services
|
|
$ |
4,101
|
|
|
$ |
3,136
|
|
|
$ |
965
|
|
|
|
31%
|
|
|
Managed
services
|
|
|
1,614
|
|
|
|
880
|
|
|
|
734
|
|
|
|
83%
|
|
|
Subscriptions
|
|
|
416
|
|
|
|
410
|
|
|
|
6
|
|
|
|
1%
|
|
|
Total
|
|
$ |
6,131
|
|
|
$ |
4,426
|
|
|
$ |
1,705
|
|
|
|
|
|
Web
Development Services :
Gross
profit from web services increased by $965 thousand, or 31%. This
represents a 48% gross profit margin in fiscal 2007, consistent with margins
achieved in fiscal 2006. This increase in dollars is attributable
largely to the increase in sales. Our Web Development
Services are primarily driven by salaries and wages and outside
contractor costs. Web 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. Margin improvements come from efficiency on engagements
where the fee is fixed or when billable hours increases without an increase
in
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 web 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 further in subsequent years.
Managed
Services:
Gross
profit increased by $734 thousand, or 83%. This represents a 79%
gross profit margin for fiscal 2007, compared to a gross profit margin of 71%
in
fiscal 2006. The improvement in margins is primarily due to the
increased revenues and cost containment measures taken to reduce
costs. Costs for managed services include the cost of operating our
network operation centers (NOCs). As of September 30, 2007, we have
two NOCs operational. One of those NOCs was part of the acquisition
of OW during fiscal 2007. Prior to that acquisition, we operated one
NOC for the majority of the fiscal year. Our costs associated with
the NOC largely include the facility charges for each location. Our
current facilities have capacity and can be expanded with our growth in revenue
without adding substantial costs. This allows margins to improve 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.
Subscriptions:
Gross
profits from subscriptions were largely unchanged in dollars, increasing $6
thousand or 1% from the prior year. In fiscal 2007, gross profit
margins were 94%, compared to 88% in fiscal 2006. Costs for the
subscription revenue include a shared of the cost of our NOCs and costs to
maintain the software product. During fiscal 2007, we shifted much of
our efforts from maintaining the current on-demand software product sold through
subscriptions to the development of our new product, iAPPS. As such,
costs associated with maintaining the product decreased. In addition,
we consolidated two NOCs early in the fiscal year, 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, technology development expenses and depreciation and
amortization expense. Overall, loss from operations increased $196
thousand, or 24%. This increased loss from operations is attributable
to several factors. In fiscal 2007, we adopted SFAS No. 123R in
accounting for stock compensation. The Company recognized $332
thousand in stock compensation, of which $242 thousand was included in operating
expenses. In addition, we increased our spending on technology
development by $615 thousand. This represents over three times the
spending level in fiscal 2006. These increases in costs were offset
by our ability to leverage the existing infrastructure, including sales and
marketing, finance and human resources, while supporting the growth in revenue.
A brief discussion of each component follows.
Sales
and
Marketing Expenses:
Sales
and
marketing expenses increased $261 thousand, or 8%, when compared to fiscal
2006. We look at sales and marketing as a percentage of
sales. For fiscal 2007, sales and marketing represented 31% of sales,
compared to 39% in fiscal 2006. 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 2008. On an absolute dollars basis, the
increase in sales and marketing expenses is largely due to increased marketing
expenses and increased sales force headcount in fiscal 2007. During
fiscal 2007, we attended and sponsored
a number of seminars and conferences, adding to the marketing expenses when
compared to fiscal 2006. 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 $843 thousand, or 51%, when compared
to
the same period in fiscal 2006. This increase is due to several
factors. In Fiscal 2007, we adopted SFAS No. 123R in accounting for
stock compensation. This resulted in the recognition of $242 thousand
in additional general and administrative expense when compared to fiscal
2006. In addition, our payroll expenses increased due to increased
headcount at our corporate offices. We hired additional personnel
during fiscal 2007 primarily in our accounting function when compared to fiscal
2006. As of September 30, 2007, we believe that there are limited
needs to hire additional personnel in corporate and that the infrastructure
can
absorb additional acquisitions without additional personnel. Total
payroll increased in fiscal 2007 by $570 thousand.
Technology
Development:
Expenses
for technology and development increased $615 thousand in fiscal 2007 or more
than three times the same level as fiscal 2006. The increased
spending during fiscal 2007 was incurred to develop our new on-demand software
product, iAPPS Framework. In addition to the development the iAPPS
Framework, we also spent funds on the development of the various modules,
including iAPPS Content Manager. We anticipate spending additional
amounts in fiscal 2008 as we continue to develop and launch the remaining
modules during the fiscal year. 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 believe that
the cost would have been more than five times that cost had we not used our
India personnel.
Depreciation
and Amortization:
The
increase in depreciation and amortization of $182 thousand during fiscal 2007,
a
97% increase, is largely attributable to the additional depreciation and
amortization expense associated with acquisitions. In April 2006, we
made one acquisition. The current year includes a full year of
depreciation and amortization associated with the assets acquired as compared
to
five months in fiscal 2006. During the current year, we made two
acquisitions and began depreciating and amortizing the acquired
assets. This resulted in an increase of $75 thousand to amortization
and depreciation expense when compared to fiscal 2006. In addition,
during fiscal 2007 we invested in equipment for our NOCs. As a
result, depreciation associated with our NOCs increased $67 thousand when
compared to fiscal 2006. The remaining increase is attributable the
timing of fixed asset expenditures.
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 2007, our operations
used $1.0 million in cash, compared to $733 thousand in fiscal
2006. The additional cash used is primarily attributable to the
increased losses in fiscal 2007 when compared to fiscal 2006. In June
2007, we completed our initial public offering, raising approximately $13.5
million in net proceeds. We used these proceeds to repay the outstanding debt,
including the private placement financing of $2.8 million and to make two
acquisitions. We also used cash to fund capital expenditures of $457 thousand
and contingent acquisition payments of $455 thousand. As of
September 30 2007, we have $5.2 million in cash available for
operations.
We
have
incurred annual losses since commencement of operations in 2000 and have used
a
significant amount of cash to fund our operations over the last several years.
As a result, we have an accumulated deficit of $6.1 million at September 30,
2007.
As
of
September 30, 2007, 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 $983 thousand, $775 thousand and $608
thousand for the fiscal years ending September 30, 2008, 2009, and 2010,
respectively, provided that the contingent results are
achieved. The contingent acquisition obligations are based
primarily on the achievement of positive EBITDA, as defined in the acquisition
agreements.
Cash
Flows
Working
Capital
At
September 30, 2007, we had working capital of $5.9 million. We
define working capital as current assets less current liabilities. We
had receivables of $2.9 million. This compares to $810 thousand in
receivables at September 30, 2006. The level of trade receivables at
September 30, 2007 and September 30, 2006 represented approximately 64 and
45 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, 2007 decreased $278 thousand from
September 30, 2006 principally due to the timing of billing in accordance with
stated contract terms.
Investing
Activities
Net
cash
used in investing activities was $5.1 million in fiscal 2007, compared to $842
thousand in fiscal 2006. In fiscal 2007, we used $4.2 million in cash
for the acquisitions of OW and PM, an increase of approximately $3.7 million
when compared to 2006. We also spent $457 thousand in capital
expenditures. During fiscal 2007, we invested 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 $455 thousand.
Financing
Activities
Net
cash
provided by financing activities was $10.7 million for fiscal 2007, compared
to
$2.0 million in fiscal 2006. As noted above, the Company completed an
initial public offering of equity securities that raised $13.5
million. We used some of these proceeds to repay existing
debt.
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
2008. We believe that cash requirements for capital expenditures will
be approximately $500 thousand during fiscal 2008. We believe
operating cash flows will be used to fund these expenditures. Funds
required for acquisitions, if any, will be funded from the remaining cash flows
from operations and existing working capital.
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, 2007:
(in
thousands)
| |
|
|
FY
08
|
|
FY
09
|
|
FY
10
|
|
FY
11
|
|
FY
12
|
|
Totals
|
|
Payment
Obligations by Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases (A)
|
|
|
$
698
|
|
$
505
|
|
$
440
|
|
$ 340
|
|
$
—
|
|
$ 1,983
|
|
Capital
lease obligations
|
|
|
102
|
|
75
|
|
48
|
|
35
|
|
10
|
|
270
|
|
Contingent
acquisition payments (B)
|
|
|
1,232
|
|
1,150
|
|
750
|
|
—
|
|
|
|
3,132
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
2,032
|
|
$
1,730
|
|
$ 1,238
|
|
$ 375
|
|
$ 10
|
|
$
5,385
|
|
(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
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 goodwill and other intangible assets;
and
|
|
·
|
Accounting
for stock-based compensation.
|
Revenue
Recognition. Substantially all of our revenue is
generated from three activities: Web Development Services , Managed Services,
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.
Web
Development Services
Web
Development Services include professional services primarily related
to our Web development solutions that address specific customer needs such
as information architecture and usability engineering, interface configuration,
Web application development, rich media, e-Commerce, e-Learning and
e-Training, search engine optimization, and content management. Web Development
Services engagements often include a hosting arrangement that
provides for the use of certain hardware and infrastructure, generally at
our network operating center. As described further below, revenue for these
hosting arrangements is included in Managed Services. Web Development
Services engagements that include hosting arrangements are accounted
for as multiple element arrangements as described below under
“Multiple-Element Arrangements.”
For
Web
Development Services engagements sold on a stand alone basis, revenue
is recognized in accordance with SAB 104. Web 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 Web
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.
Web
Development Services are often sold as part of multiple element
arrangements wherein perpetual licenses for our software product, retained
professional services, hosting and/or Subscriptions are provided in connection
with Web Development Services engagements. Our revenue recognition
policy with respect to these multiple element arrangements is described further
below under the caption “Multiple Element Arrangements.”
Sales
of
perpetual licenses for our software products and related post-contract customer
support (“PCS”) are included in Web Development
Services. Revenues derived from perpetual license sales have been
insignificant in all periods presented (representing less than 2% of Web
Development Services revenues).
Managed
Services
Managed
Services include retained professional services and hosting
services.
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 our network operating center. For all periods
presented, the only customers under contractual hosting arrangements have been
previous Web Development Services customers. Hosting revenue has historically
been insignificant to both our business strategy and to total revenues. Set-up
costs associated with hosting arrangements are not significant and we do
not charge our customers any set-up fees. Hosting agreements are
month-to-month arrangements that provide for termination for convenience by
either party 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
Subscriptions revenue.
Retained
professional services are sold on a stand-alone basis or, as described below,
in
multiple element arrangements with Web Development Services and, occasionally,
Subscriptions. Hosting services are only sold in connection with Web
Development Services and are not 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.”
Subscriptions
Subscriptions
consist of agreements that provide access to our Orgitecture software (“Licensed
Subscription Agreements”) through a hosting arrangement.
Licensed
Subscription Agreements are sold exclusively as a component of multiple element
arrangements that include Web Development Services and, occasionally, retained
professional services and hosting services. Our revenue recognition
policy for such multiple element arrangements is described below under the
caption “Multiple Element Arrangements.” We have concluded that,
consistent with EITF 00-3, Application of AICPA SOP 97-2, “Software Revenue
Recognition”, to Arrangements That Include the Right to
Use Software Stored on Another Entity's Hardware, that our Licensed
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. Licensed
Subscription Agreements are 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 related hosting
services are delivered. When an up-front fee is charged, the revenue related
to
such up-front fee is amortized over 24 months.
Multiple
Element Arrangements
As
described above, Web 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 a Web
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 EITF 00-21 and, as described
further below, have concluded that each element can be treated as a
separate unit of accounting.
When
Web
Development Services engagements include a perpetual license for our
software products, we have concluded that the Web Development Services and
the
perpetual license are separate units of accounting as each has stand-alone
value
to the customer and we have established vendor specific objective evidence
(VSOE) of fair value for the
software and objective and reliable third party evidence of fair value for
the Web Development Services. In such arrangements, the perpetual
license is the delivered element and the Web Development Services, and any
PCS are the undelivered elements. We recognize revenue from perpetual
licenses and related PCS in accordance with SOP 97-2 and recognize revenue
from
Web Development Services following the proportional performance model as
described above. The amount of revenue to be recognized upon delivery
of the software is determined using the residual method whereby the value
ascribed to the delivered element (i.e., the product license) is equal to the
total consideration of the multiple element arrangement less the third
party evidence of fair value of the undelivered elements (i.e., Web Development
Services and, if applicable, PCS).
Following
SOP 97-2, revenue is recognized upon delivery of the perpetual license because
the Web Development Services are not essential to the functionality of the
software and we have established VSOE of fair value for the
software. Any related PCS revenue is also recognized upon
delivery of the software since PCS is included with the price of the software
license, extends only for a period of one year or less and the cost of
providing the PCS is deemed to be insignificant. PCS does not
contain rights to unspecified upgrades to the software, nor have
we issued any upgrades.
When
Web
Development Services engagements include retained professional services and
hosting services and/or Subscriptions, we have concluded that each element
can be accounted for separately as the delivered elements (i.e., the Web
Development Services) have stand alone value and there is objective and
reliable third party evidence of fair value for each of the undelivered elements
(i.e., the Retained professional services and hosting services and/or
Subscriptions). Web Development Services are available from
other vendors and are regularly sold by us on a stand-alone basis pursuant
to a standard price list which is not discounted. Web Development Services
do
not involve significant production, modification, or customization of our
licensed software products. Objective and reliable third party evidence of
fair value for the undelivered elements has been established as our retained
professional services, hosting services and Licensed Subscription
Agreements are sold pursuant to standard price lists which are not
discounted.
The
amount of revenue to be recognized in the multiple element arrangements
described above is determined using the residual method whereby the value
ascribed to the delivered element (i.e., the Web Development Services) is equal
to the total consideration of the multiple element arrangement less the
third party evidence of fair value of the undelivered elements (i.e., retained
professional services, hosting services and/or Licensed Subscription
Agreements).
Direct
costs associated with web development services and retained professional
services are recorded as the services are delivered and the corresponding
revenue is recognized. Direct costs associated with Licensed
Subscription Agreements or hosting services are expensed as
incurred.
Customer
Payment Terms
Our
payment terms with customers typically are “net 30 days from invoice”.
Payments terms may vary by customer but in generally do not exceed 45 days
from invoice date. For Web 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 Web 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.
The
results of the assessments performed to date was that the fair value of the
reporting unit exceeded its carrying amount; therefore, no impairment
charges to the carrying value of goodwill have been recorded since
inception.
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.
Stock-Based
Compensation
At
September 30, 2007, we maintained two stock-based compensation plans which
are
more fully described in Note 9.
Effective
October 1, 2006, we adopted FASB Statement No. 123R, Share-Based
Payments (“SFAS 123R”).Because we used the fair-value-based method for
disclosure under SFAS 123, Accounting for Stock-Based Compensation
(“SFAS 123”), we adopted SFAS 123R using the modified prospective method. Under
the modified prospective method, compensation expense recognized beginning
on that date will include: (a) compensation expense for all
share-based payments granted prior to, but not yet vested as of
October 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123, and
(b) compensation expense for all share-based payments granted on or
after October 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R. The pro forma effect of
stock-based compensation expenses pursuant to SFAS 123R is disclosed in the
financial statements. Under the modified prospective transition method, the
results for prior periods are not restated.
Through
September 30, 2006, we accounted for stock compensation awards under the
provisions of SFAS 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, we 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.
Under
the
intrinsic value method, compensation expense is determined at the measurement
date, generally the date of grant, as the excess, if any, of the estimated
fair value of our common stock (the “Stock Price”) and the exercise
price, multiplied by the number of options granted. Generally, we grant
stock options with exercise prices equal to or greater than the Stock
Price; however, to the extent that the Stock Price exceeds the exercise price
of
stock options on the date of grant, we record stock-based compensation
expense using the graded vested attribution method over the vesting schedule
of
the options, which is generally three years.
Prior
to
June 28, 2007, there had been no public market for our common stock to observe
its Stock Price on award grant dates. Therefore, for purposes of applying
the intrinsic value method, management estimated the stock price based on the
American Institute of Certified Public Accountants Practice Alert No.
00-1, Accounting for Certain Equity Transactions. The estimated
fair value of the common stock on the date of grant was based on weighing a
variety of different quantitative and qualitative factors including, but
not limited to, our financial position, an evaluation of our competition, the
economic climate in the marketplace, the illiquid nature of the common
stock, contemporaneous and anticipated private sales of the common stock, and
our analysis of the trading prices of a peer group of comparable public
companies.
Prior
to
our initial public offering, we had a policy whereby, when issuing stock options
or warrants, the fair value of the underlying common stock would be based
on valuations prepared by management. Management performed internal
valuations (“Level C”, as defined in the AICPA Audit and Accounting Aid
Series, “Valuation of Privately-Held-Company
Equity Securities Issued as Compensation”) to
determine the fair value of the
stock. Management utilized market data from a
third party in developing our valuation methodology and
models.
Determining
the fair value of our stock required making complex and subjective
judgments. Our approach to valuation was based on several
factors. Since August 1, 2005 and up to our initial public offering,
we did not complete any private placement sales of our common stock, and
accordingly, we used an approach to valuation based on a weighted average of
enterprise value as determined using three customary valuation techniques:
the
discounted cash flow method, the market approach, and the guideline public
company method. We believe that due to our size, continued operating
losses, a business plan highly dependent on future acquisitions, and our limited
ability to raise the capital for such acquisitions, that a weighted average
of
these three techniques was the most reasonable approach to the valuation of
our
stock. Management's weighting of the three techniques is
subjective. We believe, however, that the enterprise value derived using
the public company guideline approach was most representative of our business
and, therefore, we have applied the highest weighting to this factor in all
periods. We applied a lower weighting to the results derived
from the discounted cash flow method because the cash flows used in this method
were based on future events with varying degrees of uncertainty. We increased
the weighting on this factor slightly during the nine-month period ended
June 30, 2007 as we deemed current estimates of cash flow to be more
predictable and achievable. We applied the lowest rating to the
results of the market approach because this technique depends on analyses of
mergers and acquisitions of comparable entities and there have been a relatively
small number of such transactions to analyze.
The
changes in the fair value of our common stock at the date of stock option grants
is principally attributable to the changes in our estimates of earnings and
revenues during the applicable periods, and the accretive effect of such changes
when applying the weighted values of the three valuation techniques
utilized. The slight increase in the weighting applied to the
discounted cash flow method described above did not have significant effect
on
the per share enterprise value determined for that period.
Under
the
discounted cash flow method, since we are an emerging growth company with a
business plan highly dependent on acquisitions, estimates of revenue, market
growth rates and costs are used when applying the appropriate discount
rates. Discount rates utilized in our analyses ranged from 35% to 21%
based on a capital asset pricing model (“CAPM”) which considered factors such as
risk-free rate of return, an equity risk adjustment, the beta for companies
in
our SIC code (7372), and a size discount due to our limited revenues. The
difference in the discount rates applied is attributable to changes in the
above
factors that comprise the rate, which factors are updated annually. A higher
discount rate is used for periods from August 2005 to September 2006 based
on
management's forecast of rapid growth in revenues and earnings based on
future events with varying degrees of uncertainty. Management
determined that a 13% forecasting uncertainty factor should be added to the
discount rate computed using the CAPM. The financial estimates we
used are consistent with the plans and estimates that we use to manage our
business. We complete a five-year business plan each fiscal year, which plans
are updated semi-annually. We believe a five-year outlook is
consistent with the long-term business cycle of the Web Development Services
industry. However, there is inherent uncertainty in making these
estimates and based on historical significant differences between prior
forecasts and prior actual results, we applied a lower weighting to the
enterprise value determined using the discounted cash flow method.
Under
the
market approach and guideline public company method, we evaluated a variety
of
financial ratio metrics to determine the value multiples to be utilized in
our
valuation models, including price-to-cash flow, price-to-earnings, market value
of invested capital (“MVIC”)-to-earnings before interest and taxes
(“EBIT”),MVIC-to-EBITDA, price-to-assets and MVIC-to-revenue. After
evaluating these metrics, we believe, since we have incurred losses
historically, and since a number of comparable companies in our analyses have
also reported losses, that the most appropriate multiple to apply is
MVIC-to-revenues. This is the ratio used in our valuation model under
the market approach and guideline public company method.
Under
the
market approach, we evaluated merger and acquisition transactions involving
comparable public and private companies to determine our enterprise value using
estimated revenues and applying the comparable multiple derived from such
transactions. We used data provided by a third party database to evaluate recent
merger and acquisition transactions. We qualified our selection to
only include those transactions within SIC code 7372, then we limited those
transactions to Internet related companies and then further refined our
selection to those entities within the Web Development Services industry that
had revenues and total asset size most comparable to ours. Since our revenues
are considerably lower and we have incurred losses since inception in relation
to the comparable group, we apply the lowest weighting to the enterprise value
derived using the market approach.
The
final
technique utilized in our analysis is the guideline public company method.
We
used data provided by a third party for ten comparable publicly traded
companies. We qualified our selection of comparable public companies to only
include those companies within SIC code 7372, then we limited the selection
to
only internet related companies and then further refined our selection to those
companies within the Web Development Services industry. Due to our
relatively small size, continued operating losses and the high risks associated
with our forecasted revenue growth through acquisitions, we determined our
enterprise value by multiplying our rolling twelve months sales by the
MVIC-to-revenues ratio applicable to those companies in the statistical 10thpercentile
(on a
scale of 100%). Since revenue growth is dependent on raising large
amounts of capital, we believe it results in a higher risk and therefore
conclude that a 10th percentile
MVIC-to-revenues ratio is reasonable to apply in our model. We
believe that a value market multiple of comparable public companies based on
MVIC-to-revenues provides an objective basis for measuring our fair market
value. Accordingly, we placed the highest weighting on this factor in our
analysis.
The
weighted average enterprise value determined, as described above, was reduced
by
a lack of marketability discount of 20% which reflects our small size, our
continued losses since inception and our inability to provide a distribution
of
earnings to shareholders. We also considered the post-public offering
holding periods applicable to existing stock, warrant and option holders as
potential risks to marketability. These holding periods range from
six months to one year.
We
used
the per share enterprise value determined above as an input to the
Black-Scholes-Merton option valuation model in determining stock-based
compensation, or if applicable, pro forma stock-based
compensation. For fiscal 2007, had the Company used different
assumptions, the results of the stock compensation would not be materially
different. The most sensitive of theses assumptions is
volatility. Had the Company used a volatility 500 basis higher or
lower than the current estimates, the related stock compensation could increase
or decrease by as much as $55 thousand over the life of options granted in
the
current year.
Recent
Accounting Pronouncements
In
September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”). SAB 108 was issued in order to eliminate the
diversity of practice surrounding how public companies quantify financial
statement misstatements. Traditionally, there have been two widely-recognized
methods for quantifying the effects of financial statement misstatements: the
“roll-over” method and the “iron curtain” method. The roll-over method focuses
primarily on the impact of a misstatement on the income statement —
including the reversing effect of prior year misstatements — but its use
can lead to the accumulation of misstatements in the balance sheet. The
iron-curtain method, on the other hand, focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on the reversing
effects of prior year errors on the income statement. In SAB 108, the SEC
staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of
a
company’s financial statements and the related financial statement disclosures.
This model is commonly referred to as a “dual approach” because it requires
quantification of errors under both the iron curtain and the roll-over methods.
Management of the Company has evaluated SAB 108 and believes its adoption will
not materially impact the consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in accounting principles generally accepted in the United States
of
America, and expands disclosures about fair value measurements. SFAS 157
prioritizes the inputs to valuation techniques used to measure fair value into
a
hierarchy containing three broad levels. The fair value hierarchy gives the
highest priority to quoted prices (unadjusted) in active markets for identical
assets and liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). In some cases, the inputs used to measure fair value might fall
in
different levels of the fair value hierarchy. The level in the fair value
hierarchy within which the fair value measurement in its entirety falls shall
be
determined on the lowest level input that is significant to the fair value
measurement in its entirety. Assessing the significance of a particular input
to
the fair value measurement in its entirety requires judgment, considering
factors specific to the asset or liability. SFAS No. 157 is effective for
interim and annual financial statements for fiscal years beginning after
November 15, 2007. Upon initial adoption of SFAS 157, differences between the
carrying value and the fair value of those instruments shall be recognized
as a
cumulative-effect adjustment to the opening balance of retained earnings for
that fiscal year, and the effect of subsequent adjustments resulting from
recurring fair measurements shall be recognized
in earnings for the period. The Company has not yet adopted SFAS 157. As a
result, the consolidated financial statements do not include any adjustments
relating to any potential adjustments to the carrying value of assets and
liabilities. Management of the Company is currently evaluating the impact of
SFAS 157 on the consolidated financial statements.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement
No. 109 (“FIN 48”), which clarifies the accounting for
uncertainty in tax positions. FIN No. 48 requires that the Company
recognize the impact of a tax position in the financial statements, if that
position is more likely than not to be sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective
for fiscal years beginning after December 15, 2006, with the cumulative effect,
if any, of the change in accounting principle recorded as an adjustment to
opening retained earnings. Management of the Company has evaluated FIN 48
and believes its adoption will not materially impact the consolidated financial
statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and liabilities at fair
value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is in the process of
evaluating the impact of the adoption of this statement on the Company’s results
of operations and financial condition.
In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS
141R”), which replaces FASB 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.
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, 2007 and 2006, 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, 2007 and 2006, 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
19, 2007
Boston,
Massachusetts
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except per share data)
|
ASSETS
|
|
September
30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,219
|
|
|
$
|
591
|
|
|
Accounts
receivable (less allowance for doubtful accounts of $101 and $52,
respectively)
|
|
|
2,892
|
|
|
|
810
|
|
|
Unbilled
receivables
|
|
|
355
|
|
|
|
633
|
|
|
Prepaid
expenses and other current assets
|
|
|
192
|
|
|
|
39
|
|
|
Total
current assets
|
|
|
8,658
|
|
|
|
2,073
|
|
|
Equipment
and improvements, net
|
|
|
961
|
|
|
|
429
|
|
|
Definite-lived
intangible assets, net
|
|
|
1,441
|
|
|
|
303
|
|
|
Goodwill
|
|
|
14,426
|
|
|
|
6,346
|
|
|
Deferred
financing fees, net
|
|
|
—
|
|
|
|
273
|
|
|
Other
assets
|
|
|
273
|
|
|
|
400
|
|
|
Total
assets
|
|
$
|
25,759
|
|
|
$
|
9,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Senior
notes payable
|
|
$
|
—
|
|
|
$
|
2,497
|
|
|
Capital
lease obligations – current
|
|
|
76
|
|
|
|
45
|
|
|
Accounts
payable
|
|
|
652
|
|
|
|
581
|
|
|
Deferred
revenue
|
|
|
725
|
|
|
|
264
|
|
|
Accrued
liabilities
|
|
|
1,266
|
|
|
|
706
|
|
|
Total
current liabilities
|
|
|
2,719
|
|
|
|
4,093
|
|
|
Capital
lease obligations, less current portion
|
|
|
146
|
|
|
|
99
|
|
|
Other
long term liabilities
|
|
|
19
|
|
|
|
—
|
|
|
Total
liabilities
|
|
|
2,884
|
|
|
|
4,192
|
|
|
|
|
|
|
|
|
|
|
|
|
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: 8,648,950
and 4,273,833 shares issued and outstanding, respectively
|
|
|
9
|
|
|
|
4
|
|
|
Additional
paid-in capital
|
|
|
28,908
|
|
|
|
9,791
|
|
|
Accumulated
deficit
|
|
|
(6,060
|
)
|
|
|
(4,163
|
)
|
|
Accumulated
other comprehensive income
|
|
|
18
|
|
|
|
—
|
|
|
Total
shareholders’ equity
|
|
|
22,875
|
|
|
|
5,632
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
25,759
|
|
|
$
|
9,824
|
|
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,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Web
development services
|
|
$
|
8,659
|
|
|
$
|
6,525
|
|
|
Managed
services
|
|
|
2,050
|
|
|
|
1,243
|
|
|
Subscription
|
|
|
442
|
|
|
|
467
|
|
|
Total
revenue
|
|
|
11,151
|
|
|
|
8,235
|
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
Web
development services
|
|
|
4,558
|
|
|
|
3,389
|
|
|
Managed
services
|
|
|
436
|
|
|
|
363
|
|
|
Subscription
|
|
|
26
|
|
|
|
57
|
|
|
Total
cost of revenue
|
|
|
5,020
|
|
|
|
3,809
|
|
|
Gross
profit
|
|
|
6,131
|
|
|
|
4,426
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
3,488
|
|
|
|
3,227
|
|
|
General
and administrative
|
|
|
2,489
|
|
|
|
1,646
|
|
|
Technology
development
|
|
|
791
|
|
|
|
176
|
|
|
Depreciation
and amortization
|
|
|
369
|
|
|
|
187
|
|
|
Total
operating expenses
|
|
|
7,137
|
|
|
|
5,236
|
|
|
Loss
from operations
|
|
|
(1,006
|
)
|
|
|
(810
|
)
|
|
Interest
and other expense
|
|
|
(924
|
)
|
|
|
(638
|
)
|
|
Other
income
|
|
|
33
|
|
|
|
—
|
|
|
Loss
before income taxes
|
|
|
(1,897
|
)
|
|
|
(1,448
|
)
|
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(1,897
|
)
|
|
$
|
(1,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.36)
|
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Number
of weighted average shares:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
5,285,787
|
|
|
|
4,046,278
|
|
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, 2005
|
|
|
3,903,833
|
|
|
4
|
|
|
8,303
|
|
|
(2,715)
|
|
|
—
|
|
|
5,592
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock for acquisition
|
|
|
320,000
|
|
|
—
|
|
|
838
|
|
|
—
|
|
|
—
|
|
|
838
|
|
|
Exercise
of warrants
|
|
|
50,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance
of common stock warrants in private placement
of debt
|
|
|
—
|
|
|
—
|
|
|
646
|
|
|
—
|
|
|
—
|
|
|
646
|
|
|
Stock
based compensation
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,448)
|
|
|
—
|
|
|
(1,448)
|
|
|
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
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
2007
|
|
|
2006
|
|
|
Net
loss
|
|
$
|
(1,897
|
)
|
|
$
|
(1,448
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
244
|
|
|
|
186
|
|
|
Amortization
of intangible assets
|
|
|
158
|
|
|
|
119
|
|
|
Amortization
of debt discount and deferred financing fees
|
|
|
576
|
|
|
|
436
|
|
|
Stock
based compensation
|
|
|
332
|
|
|
|
4
|
|
|
Gain
on sale of assets
|
|
|
(1
|
)
|
|
|
—
|
|
|
Changes
in operating assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and unbilled receivables
|
|
|
(539
|
)
|
|
|
(498
|
)
|
|
Other
assets
|
|
|
30
|
|
|
|
(287
|
)
|
|
Accounts
payable and accrued liabilities
|
|
|
422
|
|
|
|
721
|
|
|
Deferred
revenue
|
|
|
(309
|
)
|
|
|
34
|
|
|
Total
adjustments
|
|
|
913
|
|
|
|
715
|
|
|
Net
cash used in operating activities
|
|
|
(984
|
)
|
|
|
(733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired
|
|
|
(4,230
|
)
|
|
|
(553
|
)
|
|
Proceeds
from sale of assets
|
|
|
15
|
|
|
|
—
|
|
|
Contingent
acquisition payments
|
|
|
(455
|
)
|
|
|
(126
|
)
|
|
Equipment
and improvements expenditures
|
|
|
(457
|
)
|
|
|
(163
|
)
|
|
Net
cash used in investing activities
|
|
|
(5,127
|
)
|
|
|
(842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
(Payments
on)/proceeds from issuance of senior notes payable, net of deferred
costs
|
|
|
(2,800
|
)
|
|
|
2,434
|
|
|
Proceeds
from issuance of common stock, net of $2,434 in fees
|
|
|
13,535
|
|
|
|
—
|
|
|
Proceeds
from / payments on financing agreement, net
|
|
|
|
|
|
|
(292
|
)
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
59
|
|
|
|
—
|
|
|
Principal
payments on capital leases
|
|
|
(54
|
)
|
|
|
(29
|
)
|
|
Principal
payments on notes payable to shareholders
|
|
|
—
|
|
|
|
(85
|
)
|
|
Net
cash provided by financing activities
|
|
|
10,740
|
|
|
|
2,028
|
|
| |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
4,628
|
|
|
|
453
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
591
|
|
|
|
138
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
5,219
|
|
|
$
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
318
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash activities:
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for acquisitions
|
|
$
|
5,196
|
|
|
$
|
838
|
|
|
Warrants
issued in connection with equity and debt
transactions
|
|
$
|
531
|
|
|
$
|
646
|
|
|
Purchase
of capital equipment through capital leases
|
|
$
|
63
|
|
|
$
|
129
|
|
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®
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; and in Chicago, IL. 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
April
7, 2006, the Company affected a 3 to 1 reverse stock split. The reduction in
the
number of shares as a result of the reverse stock split has been reflected
retroactively for all periods presented. 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 2007, 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
Substantially
all of the Company’s revenue is generated from three activities: Web Development
Services, Managed Services, 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.
Web
Development Services
Web
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,
Web
application development, rich media, e-Commerce, e-Learning and e-Training,
search engine optimization, and content management. Web 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. Web development services
engagements that include hosting arrangements are accounted for as multiple
element arrangements as described below under “Multiple-Element
Arrangements.”
For
Web
Development Services engagements sold on a stand alone basis, revenue is
recognized in accordance with SAB 104. Web 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 Web 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.
Web
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 Web 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.”
Sales
of
perpetual licenses for the Company’s software products and related post-contract
customer support (“PCS”) are included in Web Development
Services. Revenues derived from perpetual license sales have been
insignificant in all periods presented (representing less than 2% of Web
Development Services revenues).
Managed
Services
Managed
Services include retained professional services and hosting
services.
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 center. For all periods
presented, the only customers under contractual hosting arrangements have been
previous Web Development Services customers. Hosting revenue has historically
been insignificant to both the Company’s business strategy and to total
revenues. Set-up costs associated with hosting arrangements are not significant
and the Company does not charge its customers any set-up
fees. Hosting agreements are month-to-month arrangements that provide
for termination for convenience by either party 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 Web Development Services and, occasionally,
Subscriptions. Hosting services are only sold in connection with Web
Development Services and are not 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.”
Subscriptions
Subscriptions
consist of agreements that provide access to the Company’s Orgitecture software
(“Licensed Subscription Agreements”) through a hosting arrangement.
Licensed
Subscription Agreements are sold exclusively as a component of multiple element
arrangements that include Web Development Services and, occasionally, retained
professional services and hosting services. The Company’s revenue
recognition policy for such multiple element arrangements is described below
under the caption “Multiple Element Arrangements.” The Company has
concluded that, consistent with EITF 00-3, Application of AICPA SOP 97-2,
“Software Revenue Recognition”, to Arrangements That Include the Right to Use
Software Stored on Another Entity’s Hardware, that its Licensed
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. Licensed Subscription
Agreements are 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 related hosting services are delivered. When an
up-front fee is charged, the revenue related to such up-front fee is amortized
over 24 months.
Multiple
Element Arrangements
As
described above, Web 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
a
Web
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 EITF 00-21 and, as described further
below, has concluded that each element can be treated as a separate unit of
accounting.
When
Web
Development Services engagements include a perpetual license for the Company’s
software products, the Company has concluded that the Web Development Services
and the perpetual software license are separate units of accounting as each
has
stand-alone value to the customer and the Company has established vendor
specific objective evidence (VSOE) of fair value for the software and objective
and reliable third party evidence of fair value for the Web Development
Services. In such arrangements, the perpetual license is the
delivered element and the Web Development Services, and any PCS are the
undelivered elements. The Company recognizes revenue from perpetual
licenses and related PCS in accordance with SOP 97-2 and recognizes revenue
from
Web Development Services following the proportional performance model as
described above. The amount of revenue to be recognized upon delivery
of the software is determined using the residual method whereby the value
ascribed to the delivered element (i.e., the NetEDITOR license or iAPPS license)
is equal to the total consideration of the multiple element arrangement less
the
third party evidence of fair value of the undelivered elements (i.e., Web
Development Services and, if applicable, PCS).
Following
SOP 97-2, revenue is recognized upon delivery of the perpetual software license
because the Web Development Services are not essential to the functionality
of
the software and the Company has established VSOE of fair value for the
software. Any related PCS revenue is also recognized upon delivery of
the software since PCS is included with the price of the software license,
extends only for a period of one year or less and the cost of providing the
PCS
is deemed to be insignificant. PCS does not contain rights to
unspecified upgrades to the software, nor has the Company issued any
upgrades.
When
Web
Development Services engagements include retained professional services and
hosting services and/or Subscriptions, the Company has concluded that each
element can be accounted for separately as the delivered elements (i.e., the
Web
Development Services) have stand alone value and there is objective and reliable
third party evidence of fair value for each of the undelivered elements (i.e.,
the retained professional services and hosting services and/or
Subscriptions). Web Development Services are available from
other vendors and are regularly sold by the Company on a stand-alone basis
pursuant to a standard price list which is not discounted. Web Development
Services do not involve significant production, modification, or customization
of the Company’s licensed software products. Objective and reliable third party
evidence of fair value for the undelivered elements has been established as
the
Company’s retained professional services, hosting services and Licensed
Subscription Agreements are sold pursuant to standard price lists which are
not
discounted.
The
amount of revenue to be recognized in the multiple element arrangements
described above is determined using the residual method whereby the value
ascribed to the delivered element (i.e., the Web Development Services) is equal
to the total consideration of the multiple element arrangement less the third
party evidence of fair value of the undelivered elements (i.e., retained
professional services, hosting services and/or Licensed Subscription
Agreements).
Direct
costs associated with web development services and retained professional
services are recorded as the services are delivered and the corresponding
revenue is recognized. Direct costs associated with Licensed
Subscription Agreements or hosting services are expensed as
incurred.
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 45 days from
invoice date. For Web Development Services, the Company typically invoices
project deposits of between 20% and 33% of the total contract value which are
record as deferred revenue until such time the related services are completed.
Subsequent invoicing for Web 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 efficiency 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 five
U.S. operating locations and an Indian subsidiary at September 30, 2007,
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 high credit quality financial institutions.
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,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Customer
#1
|
|
|
15%
|
|
|
|
22%
|
|
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,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Customer
#1
|
|
|
*%
|
|
|
|
17%
|
|
|
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 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, 2007 and 2006 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. There has been no 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.
Technology
Development Costs
Research
and development expenditures for technology development are charged to
operations as incurred. Pursuant to SFAS No. 86 “Accounting for Cost
of Computer Systems to be Sold, Leased or Otherwise
Marketed,” Software development costs subsequent to the establishment
of technological feasibility are capitalized and amortized to cost of software
and included in cost of sales. Based on the Company’s product development
process, technological feasibility is established upon completion of a working
model. Costs incurred between completion of a working model and the point at
which the product is ready for general release are capitalized if significant.
No software development costs have been capitalized to date as a result of
the
Company’s development process.
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 incremental,
are
capitalized until the software is substantially complete and ready for its
intended use. Capitalization ceases upon completion of all substantial testing.
We also capitalize costs related to specific upgrades and enhancements when
it
is probable the expenditures will result in additional functionality.
Capitalized costs are recorded as part of property and equipment. Training
costs are expensed as incurred. Internal use software is amortized
on a straight-line basis over its estimated useful life, generally three
years.
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. As of September 30, 2007, these costs have been fully
amortized.
Deferred
Offering Costs
As
September 30, 2006, the Company incurred $116 thousand of direct costs in
connection with the initial public offering of its common
stock. These costs were included in other assets and have been
charged to additional paid in capital in fiscal 2007. In total, the
Company incurred costs of $2.5 million in connection with the initial public
offering. This amount has been charged to additional paid in
capital.
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 Company’s policy is
to perform its annual impairment testing in the fourth quarter of each fiscal
year.
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 discounted cash flow projections, market capitalization value 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. As a result of management’s
evaluation, the Company concluded there was no impairment of goodwill based
upon
its annual assessments.
Advertising
Costs
All
advertising costs are expensed when incurred. Advertising costs were $65
thousand and $124 thousand for the years ended September 30, 2007 and 2006,
respectively.
Stock-Based
Compensation
The
Company maintains two stock-based compensation plans which are more fully
described in Note 9.
Effective
October 1, 2006, the Company adopted SFAS No. 123R, Share-Based
Payments (“SFAS 123R”). Because the Company used the fair-value-based
method for disclosure under SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), it adopted SFAS 123R using the modified
prospective method. Under the modified prospective method, compensation expense
recognized beginning on that date will include: (a) compensation expense
for all share-based payments granted prior to, but not yet vested as of
October 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123, and (b) compensation
expense for all share-based payments granted on or after October 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123R. For periods prior to the adoption of SFAS 123R, the pro forma
effect of stock-based compensation expenses pursuant to SFAS 123R is disclosed
in the financial statements. Under the modified prospective transition
method the results for prior periods are not restated.
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.
Under
the
intrinsic value method, compensation expense is determined at the measurement
date, generally the date of grant, as the excess, if any, of the estimated
fair
value of the Company’s common stock (the “Stock Price”) and the exercise price,
multiplied by the number of options granted. Generally, the Company grants
stock
options with exercise prices equal to or greater than the Stock Price; however,
to the extent that the Stock Price exceeds the exercise price of stock options
on the date of grant, the Company records stock-based compensation expense
using
the graded vested attribution method over the vesting schedule of the options,
which is generally three years. The Company recognized stock-based
compensation expense of $332 thousand and $4 thousand in stock-based
compensation expense for the years ended September 30, 2007 and 2006,
respectively.
Prior
to
the Company’s initial public offering, 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. The
Company used data provided by a third party for ten comparable publicly traded
companies. Due to its relatively small size, continued operating
losses and the high risks associated with its forecasted revenue growth through
acquisitions, the Company determined its enterprise value by multiplying its
rolling twelve months sales by the market value of invested capital-to-revenues
ratio applicable to those companies in the statistical 10th percentile (on
a
scale of 100%).
The
weighted average enterprise value, as described above, is reduced by a lack
of
marketability discount of 20% which reflected the Company’s small size, its
losses since inception, and its inability to provide a distribution of earnings
to shareholders. This per share enterprise value was used as an input
to the Black-Scholes-Merton option valuation model (the “Model”) in determining
stock-based compensation.
Certain
assumptions were used by the Company in the application of the Model to estimate
the fair value of all stock options issued to employees on the grant date.
The
risk-free interest rate for all stock option grants is based on U.S. Treasury
zero-coupon issues with equivalent remaining terms. The expected life of such
options has been estimated to equal the average of the contractual term and
the
vesting term. The Company anticipates paying no cash dividends for its common
stock; therefore, the expected dividend yield is assumed to be zero. As there
was no public market for its common stock prior to June 28, 2007, the Company
estimated the volatility for options granted based on an analysis of
reported
data for a peer group of publicly traded companies that issued options with
substantially similar terms consistent with SFAS 123R and Securities and
Exchange Commission Staff Accounting Bulletin No. 107, Share Based
Payment. For purposes of calculating the pro forma compensation expense
illustrated below, the Company used its cumulative actual forfeiture rates
of
between 11% and 13% for all awards which management believes is a reasonable
approximation of anticipated future forfeitures. The fair value is amortized
ratably over the vesting period of the awards, which is typically three
years. At September 30, 2007, there was approximately $345 thousand
of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under all equity compensation
plans.
The
following disclosure illustrates the pro forma effect on net loss and net loss
per share that would have been recognized in the 2006 statement of operations
if
the fair-value-based method had been applied to all awards in accordance with
SFAS 123R. Under the fair value-based-method, the Company must measure the
estimated fair value of equity instruments awarded to employees at the grant
date for which the Company is obligated to issue when employees have rendered
the requisite service and satisfied any other conditions necessary to earn
the
right to benefit from the instruments (for example, to exercise the share
options). That estimate is not re-measured in subsequent periods. The Company
estimated the fair value of stock options issued to employees using the Model,
which requires assumptions be made by management including the economic life
of
the option, expected volatility, expected dividends and risk-free interest
rates. The Company believes that the Model provides a fair value estimate that
is consistent with the measurement objective and the fair-value-based method
of
SFAS 123R.
The
following table illustrates the pro forma effect on 2006 net loss per share
as
if the Company had applied the fair value recognition provisions of SFAS
123R:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
$
|
(1,448
|
)
|
|
|
|
Deduct:
Stock based employee
|
|
|
|
|
|
|
|
|
compensation
determined under
|
|
|
|
|
|
|
|
|
the
fair value based method
|
|
|
|
|
|
|
|
|
for
all awards, net of tax effect
|
|
|
|
(507
|
)
|
|
|
|
Pro
forma net loss
|
|
|
$
|
(1,955
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
Pro
forma net loss per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
$
|
(0.48
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
As
reported net loss per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
$
|
(0.36
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
|
4,046,278
|
|
|
|
As
stock
options vest over several years, additional stock option grants are made and
employees terminate each year, the above pro forma disclosures and related
assumptions used in the Model are not necessarily representative of pro forma
effects on operations for future periods.
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 Model as described more fully
above. The following table illustrates the inputs and assumptions used by the
Company in the application of the Model to estimate the fair value of warrants
and stock options granted to non-employees as follows:
| |
|
Year
Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Options
granted to non-employees
|
|
|
−
|
|
|
|
9,227
|
|
|
Warrants
granted to non-employees
|
|
|
150,000
|
|
|
|
392,000
|
|
|
Contractual
lives in years
|
|
|
5
|
|
|
|
5
–
10
|
|
|
Estimated
fair value of common stock
|
|
$
|
2.73
|
|
|
$
|
2.07
– 2.46
|
|
|
Exercise
prices
|
|
$
|
7.50
|
|
|
$
|
0.001
– 4.68
|
|
|
Estimated
stock volatility
|
|
|
72%
|
|
|
|
70%
|
|
|
Risk
free rate of return
|
|
5.22%
|
|
|
3.70%
to 4.93%
|
|
|
Dividend
Rate
|
|
|
0%
|
|
|
|
0%
|
|
The
intrinsic value of the options outstanding at September 30, 2007 was
approximately $725 thousand of which $638 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
2007 or 2006.
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 were 1,544,831 and 1,507,856 at September 30, 2007 and 2006,
respectively.
Recent
Accounting Pronouncements
In
September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”). SAB 108 was issued in order to eliminate the
diversity of practice surrounding how public companies quantify financial
statement misstatements. Traditionally, there have been two widely-recognized
methods for quantifying the effects of financial statement misstatements: the
“roll-over” method and the “iron curtain” method. The roll-over method focuses
primarily on the impact of a misstatement on the income statement —
including the reversing effect of prior year misstatements — but its use
can lead to the accumulation of misstatements in the balance sheet. The
iron-curtain method, on the other hand, focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on the reversing
effects of prior year errors on the income statement. In SAB 108, the SEC
staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of
a
company’s financial statements and the related financial statement disclosures.
This model is commonly referred to as a “dual approach” because it requires
quantification of errors under both the iron curtain and the roll-over methods.
Management of the Company has evaluated SAB 108 and believes its adoption will
not materially impact the consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in accounting principles generally accepted in the United States
of
America, and expands disclosures about fair value measurements. SFAS 157
prioritizes the inputs to valuation techniques used to measure fair value into
a
hierarchy containing three broad levels. The fair value hierarchy gives the
highest priority to quoted prices (unadjusted) in active markets for identical
assets and liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). In some cases, the inputs used to measure fair value might fall
in
different levels of
the
fair value hierarchy. The level in the fair value hierarchy within which the
fair value measurement in its entirety falls shall be determined on the lowest
level input that is significant to the fair value measurement in its entirety.
Assessing the significance of a particular input to the fair value measurement
in its entirety requires judgment, considering factors specific to the asset
or
liability. SFAS No. 157 is effective for interim and annual financial statements
for fiscal years beginning after November 15, 2007. Upon initial adoption of
SFAS 157, differences between the carrying value and the fair value of those
instruments shall be recognized as a cumulative-effect adjustment to the opening
balance of retained earnings for that fiscal year, and the effect of subsequent
adjustments resulting from recurring fair measurements shall be recognized
in
earnings for the period. The Company has not yet adopted SFAS 157. As a result,
the consolidated financial statements do not include any adjustments relating
to
any potential adjustments to the carrying value of assets and liabilities.
Management of the Company is currently evaluating the impact of SFAS 157 on
the
consolidated financial statements.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement
No. 109 (“FIN 48”), which clarifies the accounting for
uncertainty in tax positions. FIN No. 48 requires that the Company
recognize the impact of a tax position in the financial statements, if that
position is more likely than not to be sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective
for fiscal years beginning after December 15, 2006, with the cumulative effect,
if any, of the change in accounting principle recorded as an adjustment to
opening retained earnings. Management of the Company has evaluated FIN 48
and believes its adoption will not materially impact the consolidated financial
statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and liabilities at fair
value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is in the process of
evaluating the impact of the adoption of this statement on the Company’s results
of operations and financial condition.
In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS
141R”), which replaces FASB 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
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 on 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.
3.
Acquisitions
New
Tilt, Inc.
On
April
24, 2006, the Company acquired New Tilt, a privately held provider of Web
Development Services. New Tilt's results of operations have been included
in the consolidated financial statements since the date of acquisition. As
a
result of the acquisition, the Company expanded its services in the health
care and insurance industries. The aggregate purchase price
of approximately $1.6 million consisted of $550 thousand in cash, 320,000
shares of common stock valued at $717 thousand, 37,830 options for
common stock valued at $121 thousand and closing costs of $162 thousand.
Additional consideration of up to approximately $750 thousand may be
paid over a three-year period in cash as additional consideration. The
additional consideration described above is based upon the attainment by the
acquired entity of defined operating objectives. At September 30, 2007, the
maximum remaining future consideration pursuant to this arrangement is
approximately $500 thousand. To date $250 thousand was recorded as an
increase to goodwill under this arrangement.
Objectware,
Inc.
On
July
5, 2007, the Company acquired Objectware, Inc. (OW), a privately held provider
of Web 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, 2007,
the maximum remaining future consideration pursuant to this arrangement is
approximately $1.6 million. To date $150 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.
Purple
Monkey Studios, Inc.
On
August
31, 2007, the Company acquired Purple Monkey Studios, Inc. (PM), a
privately-held provider of Web 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 Software
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, 2007, the
maximum remaining future consideration pursuant to this arrangement is
approximately $900 thousand.
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
|
|
|
213
|
|
|
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 total amount of goodwill recognized will not be deductible
for tax purposes. The following unaudited pro forma information
reflects the results of operations of the Company as though the acquisitions
of
OW and PM were completed as of October 1, 2005:
|
|
|
Pro
Forma (Unaudited)
|
|
| |
|
Years
Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,094
|
|
|
$
|
15,326
|
|
|
Net
loss
|
|
$
|
(2,083
|
)
|
|
$
|
(987
|
)
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.33
|
)
|
|
$
|
(0.19
|
)
|
|
Number
of weighted average shares:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
6,227,211
|
|
|
|
5,311,395
|
|
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.
4.
Equipment and Improvements
Equipment
and improvements, net consisted of the following:
| |
|
As
of September 30
|
|
| |
|
2007
|
|
|
2006
|
|
|
Furniture
and fixtures
|
|
$
|
342
|
|
|
$
|
136
|
|
|
Purchased
software
|
|
|
362
|
|
|
|
124
|
|
|
Computers
and peripherals
|
|
|
951
|
|
|
|
629
|
|
|
Leasehold
improvements
|
|
|
44
|
|
|
|
38
|
|
| |
|
|
1,699
|
|
|
|
927
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
738
|
|
|
|
498
|
|
| |
|
$
|
961
|
|
|
$
|
429
|
|
Included
above are assets acquired under capitalized leases of $338 thousand and $207
thousand as of September 30, 2007 and 2006, respectively, with accumulated
depreciation thereon of $155 thousand and $92 thousand,
respectively.
The
Company has $329 thousand and $233 thousand of net property and equipment at
September 30, 2007 and 2006, respectively, for use in its hosting
arrangements.
5.
Definite Lived Intangible Assets and Goodwill
Definite
lived intangible assets and goodwill consisted of the following:
|
|
|
|
|
|
As
of September 30, 2007
|
|
|
As
of September 30, 2006
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
|
|
|
|
Asset
|
|
|
Amortization
|
|
|
Amount
|
|
|
Asset
|
|
|
Amortization
|
|
|
Amount
|
|
|
Intangible
assets;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain
and trade names
|
|
|
|
|
|
$
|
39
|
|
|
$
|
(15
|
)
|
|
$
|
24
|
|
|
$
|
29
|
|
|
$
|
(13
|
)
|
|
$
|
16
|
|
|
Customer
related
|
|
|
|
|
|
|
1,764
|
|
|
|
(352
|
)
|
|
|
1,412
|
|
|
|
478
|
|
|
|
(229
|
)
|
|
|
249
|
|
|
Acquired
software
|
|
|
|
|
|
|
95
|
|
|
|
(90
|
)
|
|
|
5
|
|
|
|
95
|
|
|
|
(57
|
)
|
|
|
38
|
|
|
Total
intangible assets
|
|
|
|
|
|
$
|
1,898
|
|
|
$
|
(457
|
)
|
|
$
|
1,441
|
|
|
$
|
602
|
|
|
$
|
(299
|
)
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
14,426
|
|
|
$
|
—
|
|
|
$
|
14,426
|
|
|
$
|
6,346
|
|
|
$
|
—
|
|
|
$
|
6,346
|
|
The
aggregate amortization expense related to intangible assets for the years ended
September 30, 2007 and 2006 is as follows:
| |
|
Total
|
|
|
Expense
Charge To
|
|
| |
|
Amortization
|
|
|
Cost
of
|
|
|
|
|
| |
|
Expense
|
|
|
Revenue
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30, 2007
|
|
$
|
159
|
|
|
$
|
33
|
|
|
$
|
126
|
|
|
Year
Ended September 30, 2006
|
|
$
|
119
|
|
|
$
|
117
|
|
|
$
|
2
|
|
The
estimated amortization expense for fiscal years 2008, 2009, 2010, 2011, 2012
and
thereafter is $325 thousand, $320 thousand, $297 thousand, $275 thousand, $214
thousand and $10 thousand, respectively.
Goodwill
increased $8 million and $1.3 million in the years ended September 30, 2007
and
2006. 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. The increase in the year
ended September 30, 2006 included $1.1 million as a result of acquisitions
and
$126 thousand due to contingent consideration earned under prior acquisition
agreements.
6.
Accrued Liabilities
Accrued
liabilities consisted of the following:
| |
|
As
of September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$
|
509
|
|
|
$
|
259
|
|
|
Subcontractors
|
|
|
90
|
|
|
|
58
|
|
|
Deferred
rent
|
|
|
65
|
|
|
|
59
|
|
|
Interest
|
|
|
—
|
|
|
|
70
|
|
|
Professional
fees
|
|
|
134
|
|
|
|
178
|
|
|
Other
|
|
|
468
|
|
|
|
82
|
|
| |
|
$
|
1,266
|
|
|
$
|
706
|
|
7.
Indebtedness
The
Company’s indebtedness consisted of the following:
Senior
Notes Payable
| |
|
As
of September 30,
|
|
| |
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Senior
notes payable
|
|
$
|
—
|
|
|
$
|
2,800
|
|
|
Discount
on senior notes payable attributable to warrants
|
|
|
—
|
|
|
|
(303
|
)
|
| |
|
$
|
—
|
|
|
$
|
2,497
|
|
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 $858 thousand and $558 thousand for the years ended September 30,
2007
and 2006, respectively.
Capital
Lease Obligations
| |
|
As
of September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
$
|
222
|
|
|
$
|
144
|
|
|
Less: Current
portion
|
|
|
(76
|
)
|
|
|
(45
|
)
|
|
Capital
lease obligations
|
|
$
|
146
|
|
|
$
|
99
|
|
As
of
September 30, 2007, the Company had remaining the following minimum lease
payments under capitalized lease obligations:
|
Year
Ending September 30,
|
|
|
|
|
2008
|
|
$
|
102
|
|
|
2009
|
|
|
75
|
|
|
2010
|
|
|
48
|
|
|
2011
|
|
|
35
|
|
|
2012
|
|
|
10
|
|
|
Totals
|
|
|
270
|
|
|
Less
interest at a weighted average of 14.15%
|
|
|
48
|
|
|
Total
capital lease obligations
|
|
$
|
222
|
|
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, 2007
were
as follows:
|
Year
Ending September 30,
|
|
|
|
|
2008
|
|
$
|
698
|
|
|
2009
|
|
|
505
|
|
|
2010
|
|
|
440
|
|
|
2011
|
|
|
340
|
|
|
Total
|
|
$
|
1,983
|
|
Rent
expense for the years ended September 30, 2007 and 2006 was approximately
$730 thousand and $615 thousand, respectively, exclusive of sublease income
of
$71 thousand and $100 thousand for the years ended September 30, 2007 and 2006,
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, 2007 and 2006.
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, 2007, 75,000 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 capi