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 capital
as
part of the direct incremental fees associated with the initial public
offering. At September 30, 2007, the Company has 467,000 warrants
outstanding.
Subsequent
to the initial issuance, the Company amended the terms of the Debt Warrants,
the
Underwriter’s Debt Warrants and IPO Warrants described above to eliminate a
provision included in error during the drafting of the
documents. This provision would have permitted the holders of the
warrants to redeem the warrants in the event that the Company’s registration
during the terms of each warrant became ineffective. The inclusion of
this provision would have required the Company to reflect the outstanding
warrants as liabilities rather than as equity, as this provision could be
interpreted as a put option with a cash settlement. The Company and
the holders of the warrants intended for the instruments to only be settled
in
equity and thus the terms were amended accordingly.
2000
Stock Incentive Plan
During
2000, the Company adopted the 2000 Stock Incentive Plan (the “Plan”) and
reserved 1.0 million shares of common stock for issuance thereunder. On
June 24, 2005 the Board of Directors increased the reserve for common stock
issued under the Plan to 1.2 million shares. The Plan authorized the award
of
incentive stock options, non-statutory stock options, restricted stock,
unrestricted stock, performance shares, stock appreciation rights and any
combination thereof to employees, officers, directors, consultants, independent
contractors and advisors of the Company. During 2006, the Company amended and
restated the Plan to conform to current tax laws and to increase the number
of
common shares reserved for issuance under the plan to 1.4 million. Options
granted under the Plan may be granted with contractual lives of up to ten years.
There were 294,338 options reserved for issuance under the Plan as of September
30, 2007.
2001
Lead Dog Stock Option Plan
In
connection with the Company’s merger with Lead Dog in February 2002, the Company
assumed Lead Dog’s 2001 Stock Option Plan (the “Lead Dog Plan”). Options under
the Lead Dog Plan may be granted for periods of up to ten years and at prices
no
less than the fair market value of the shares on the date of grant. Under the
terms of the Agreement and Plan of Merger with Lead Dog, 98,731 options of
the
Lead Dog Plan were reserved for issuance to former Lead Dog employees that
remained with the Company for one year subsequent to the
merger.
A
summary
of combined option and warrant activity is as follows:
|
|
Stock
Options
|
|
|
Stock
Warrants
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2005
|
|
|
797,907
|
|
|
$
|
2.953
|
|
|
|
236,269
|
|
|
$
|
4.273
|
|
Granted
(2)
|
|
|
204,920
|
|
|
$
|
3.750
|
|
|
|
392,000
|
|
|
$
|
1.533
|
|
Exercised
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
(50,000
|
)
|
|
$
|
0.001
|
|
Cancelled
or expired
|
|
|
(73,240
|
)
|
|
$
|
3.492
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding,
September 30, 2006
|
|
|
929,587
|
|
|
|
3.086
|
|
|
|
578,269
|
|
|
$
|
2.653
|
|
Granted
(4)
|
|
|
267,778
|
|
|
$
|
4.120
|
|
|
|
150,000
|
|
|
|
7.500
|
|
Exercised
(3)
|
|
|
(27,831
|
)
|
|
|
0.940
|
|
|
|
(59,724
|
)
|
|
$
|
0.554
|
|
Cancelled
or expired
|
|
|
(91,703
|
)
|
|
$
|
3.710
|
|
|
|
(201,545
|
)
|
|
|
4.504
|
|
Outstanding,
September 30, 2007
|
|
|
1,077,831
|
|
|
$
|
3.430
|
|
|
|
467,000
|
|
|
$
|
3.610
|
|
(1)
The
weighted average grant-date fair value of options and warrants granted during
the fiscal year ended September 30, 2005 was $3.75 and $3.75,
respectively.
(2)
The
weighted average grant-date fair value of options and warrants granted during
the fiscal year ended September 30, 2006 was $2.28 and $2.24,
respectively.
(3)
The
intrinsic value of options and warrants exercised during the year ended
September 30, 2007 was $93 thousand and $122 thousand, respectively. Warrants
exercised during the year ended September 30, 2007 had an intrinsic value of
$3.61 per share. Warrants exercised during the year ended September
30, 2006 had an intrinsic value of $2.23 per share.
(4)
The
weighted average grant-date fair value of options granted during the fiscal
year
ended 2007 was $1.50.
A
summary
of options outstanding and options exercisable at September 30,
2007:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Number
of
|
|
|
Aggregate
|
|
Exercise
|
|
|
Number
of
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Options
|
|
|
Intrinsic
|
|
Price
|
|
|
Options
|
|
|
Life
in Years
|
|
|
Value
|
|
|
Exercisable
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.003
|
|
|
|
13,334
|
|
|
|
5.00
|
|
|
$
|
58,829
|
|
|
|
13,334
|
|
|
$
|
53,829
|
|
|
$
0.357
|
|
|
|
3,220
|
|
|
|
4.41
|
|
|
$
|
11,858
|
|
|
|
3,220
|
|
|
$
|
11,858
|
|
|
$
1.072
|
|
|
|
29,675
|
|
|
|
4.41
|
|
|
$
|
88,087
|
|
|
|
29,675
|
|
|
$
|
88,087
|
|
|
$
1.200
|
|
|
|
43,111
|
|
|
|
7.21
|
|
|
$
|
122,435
|
|
|
|
43,111
|
|
|
$
|
122,435
|
|
|
$ 1.740
|
|
|
|
42,500
|
|
|
|
9.77
|
|
|
$
|
97,750
|
|
|
|
42,500
|
|
|
$
|
97,750
|
|
|
$
3.000
|
|
|
|
254,971
|
|
|
|
5.55
|
|
|
$
|
265,170
|
|
|
|
253,303
|
|
|
$
|
263,436
|
|
|
$
3.750
|
|
|
|
616,620
|
|
|
|
8.19
|
|
|
$
|
178,820
|
|
|
|
325,407
|
|
|
$
|
94,368
|
|
|
$
3.920
|
|
|
|
37,400
|
|
|
|
9.92
|
|
|
$
|
4,488
|
|
|
|
37,400
|
|
|
$
|
4,488
|
|
|
$
4.900
|
|
|
|
37,000
|
|
|
|
9.77
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
1,077,831
|
|
|
|
|
|
|
|
|
|
|
|
747,950
|
|
|
|
|
|
A
summary
of the status of Bridgeline’s nonvested shares is presented below.
Nonvested
Shares
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair
Value
|
Nonvested
at September 30, 2006
|
|
379,131
|
|
$
2.11
|
Granted
|
|
267,778
|
|
1.50
|
Vested
|
|
(295,048)
|
|
1.61
|
Forfeited
|
|
(21,981)
|
|
1.46
|
Nonvested
at September 30, 2007
|
|
329,880
|
|
$
2.26
|
As
of
September 30, 2007 there was $345 thousand of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized over a weighted average of
2.3
years. The total fair value of shares vested during the years ended September
30, 2007 and 2006 were $475 thousand and $936 thousand, respectively of which
options with a value $309 thousand and $339 thousand have been subsequently
cancelled after vesting in years ended September 30, 2007 and 2006,
respectively.
The
following table illustrates the assumptions used by the Company in the
application of the Model to calculate the compensation expense in accordance
with SFAS 123 for stock options granted to employees and
directors:
|
|
Fair
Value
|
|
|
|
|
|
|
|
Expected
|
|
Option
|
|
|
|
of
Stock
|
|
Stock
|
|
Risk
Free
|
|
Dividend
|
|
Option
Life
|
|
Exercise
|
|
|
|
Prices
|
|
Volatility
|
|
Rate
of Return
|
|
Rate
|
|
in
Years
|
|
Prices
|
|
Year
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
0.61 - $2.92
|
|
72%
|
|
4.70%
- 5.22%
|
|
0%
|
|
3.0
- 10
|
|
$
3.75 - $4.90
|
|
2006
|
|
$
2.07 - $2.46
|
|
70%
|
|
4.31%
- 4.70%
|
|
0%
|
|
6.5
- 10
|
|
$ 3.75
|
|
10.
Income Taxes
The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The sources and tax effects of the differences are as
follows:
|
|
Year
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Income
tax benefit at the federal statutory rate of 34%
|
|
$
|
(645
|
)
|
|
$
|
(538
|
)
|
Permanent
differences, net
|
|
|
335
|
|
|
|
151
|
|
State
income benefit, net of federal benefit
|
|
|
(106
|
)
|
|
|
(70
|
)
|
Change
in valuation allowance attributable to operations
|
|
|
355
|
|
|
|
464
|
|
Other
|
|
|
61
|
|
|
|
(7
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of September 30, 2007, the Company has net operating loss carryforwards (“NOLs”)
of approximately $4.8 million for federal purposes and $4.1 million for state
purposes, which will be available to offset future taxable income. Approximately
$1.2 million of the Company’s net operating losses is attributable to acquired
entities. These net operating losses were fully reserved for at the respective
acquisition dates. In the event the Company realizes these assets in the future,
the benefit will be recorded as a reduction of goodwill. If not used, the
federal carryforwards will expire between 2020 and 2027 and the state
carryforwards will expire between 2008 and 2027.
The
Company’s income tax provision was computed based on the federal statutory rate
and average state statutory rates, net of the related federal
benefit.
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
|
As
of September 30,
|
|
Deferred
tax assets:
|
|
2007
|
|
|
2006
|
|
Short-term:
|
|
|
|
|
|
|
Contract
loss reserve
|
|
$
|
1
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
|
1,892
|
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Other
|
|
|
6
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(567
|
)
|
|
|
(122
|
)
|
Depreciation
|
|
|
(140
|
)
|
|
|
(38
|
)
|
|
|
|
1,192
|
|
|
|
1,473
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
1,192
|
|
|
|
1,473
|
|
|
|
$
|
|
|
|
$
|
|
|
For
the
year ended September 30, 2007 the valuation allowance for deferred tax assets
decreased $337 thousand which was mainly due to the acquisitions of Objectware,
Inc. and Purple Monkey, Inc. offset by the operating loss
incurred. For the year ended September 30, 2006 the valuation
allowance for deferred tax assets increased $479 thousand which was mainly
due
to the operating loss incurred and $15 thousand due to the acquisition of New
Tilt. The Company has NOLs and other deferred tax benefits that are available
to
offset future taxable income. A valuation allowance is established if it is
more
likely than not that all or a portion of the deferred tax asset will not be
realized. Accordingly, the Company has established a full valuation allowance
against its net deferred tax asset at September 30, 2007 and 2006,
respectively.
In
January 2005, the Company established Bridgeline Software Pvt. Ltd in Bangalore
India under the Software Technology Parks of India law. This law establishes
a
tax holiday for the first ten years of operations; therefore the Company has
not
incurred any foreign taxes. To date, the foreign taxes not incurred as a result
of this tax holiday have not been significant.
Undistributed
earnings of the Company’s foreign subsidiary amounted to approximately $280
thousand and $186 thousand at September 30, 2007 and 2006, respectively. These
earnings are considered to be indefinitely reinvested; accordingly, no provision
for US federal and state income taxes has been provided thereon. Upon
repatriation of those earnings, in the form of dividends or otherwise, the
Company would be subject to both US income taxes (subject to an adjustment
for
foreign tax credits) and withholding taxes payable to the applicable foreign
tax
authority. Determination of the amount of unrecognized deferred US income tax
liability is not material and detailed calculations have not been performed.
As
of September 30, 2007, there would be minimal withholding taxes upon remittance
of all previously unremitted earnings.
11.
Related Party Transactions
In
connection with the acquisition of Purple Monkey Studios, Inc., the Company
entered into a lease for six months with Purple Monkey Realty
LLC. The owners of Purple Monkey Realty LLC are also employees of the
Company. The Company intends on relocating to a new space after the
terms of the initial lease expire. For the year ended September 30,
2007, the Company paid $11 thousand under this agreement.
In
April
2007, we issued secured promissory notes to our Chief Executive Officer and
a
member of the Board of Directors aggregating $200 thousand. The notes
bore interest at a rate of 15% per annum payable, along with the outstanding
principal on the notes, on the closing of the initial public offering of
securities. The Company paid $6 thousand in interest expense and
repaid the notes in their entirety in July 2007 upon the completion of the
initial public offering.