UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30, 2008
OR
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
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
or organization)
|
(I.R.S. Employer
Identification No.)
|
|
|
10 Sixth
Road
Woburn, MA
|
01801
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(781)
376-5555
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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.
x
Yes
o
No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
Common
Stock, par value $0.001 per share, outstanding as of August 11, 2008:
10,611,969
Transitional
Small Business Disclosure Format (check one): Yes
o
No
x
Bridgeline
Software, Inc.
Quarterly
Report on Form 10-QSB
For
the Quarterly Period ended June 30, 2008
Index
|
|
Page
|
Part
I
|
Financial
Information
|
|
|
|
|
Item
1.
|
Financial
Statements (unaudited)
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2008 and September 30, 2007
|
4
|
|
|
|
|
Consolidated
Statements of Operations for the three and nine months ended June 30, 2008
and 2007
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended June 30, 2008 and
2007
|
6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|
|
|
Item
3.
|
Controls
and Procedures
|
23
|
|
|
|
Part II
|
Other
Information
|
|
|
|
|
Item 1.
|
Legal
Proceedings
|
25
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
26
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
26
|
|
|
|
Item
5.
|
Other
Information
|
26
|
|
|
|
Item
6.
|
Exhibits
|
26
|
|
|
|
Signatures
|
28
|
Bridgeline
Software, Inc.
Quarterly
Report on Form 10-QSB
For
the Quarterly Period ended June 30, 2008
|
Statements
contained in this Report on Form 10-QSB 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-QSB 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 our Registration Statement on Form SB-2 as well as 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 Software” we mean
Bridgeline Software, Inc.
|
PART
I—FINANCIAL INFORMATION
Item 1.
|
Financial
Statements.
|
Bridgeline
Software, Inc.
(Dollars
in thousands except per share data)
(unaudited)
|
|
June
30,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,274
|
|
|
$
|
5,219
|
|
Accounts
receivable, net of allowance of $180 and $101
|
|
|
2,872
|
|
|
|
2,892
|
|
Unbilled receivables
|
|
|
1,691
|
|
|
|
355
|
|
Prepaid
expenses and other current assets
|
|
|
545
|
|
|
|
192
|
|
Total
current assets
|
|
|
7,382
|
|
|
|
8,658
|
|
Property
and equipment, net
|
|
|
1,197
|
|
|
|
961
|
|
Definite-lived
intangible assets
|
|
|
2,177
|
|
|
|
1,441
|
|
Goodwill
|
|
|
16,972
|
|
|
|
14,426
|
|
Other
assets
|
|
|
629
|
|
|
|
273
|
|
Total
assets
|
|
$
|
28,357
|
|
|
$
|
25,759
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Capital
lease obligations – current
|
|
$
|
115
|
|
|
$
|
76
|
|
Accounts
payable
|
|
|
989
|
|
|
|
652
|
|
Deferred
revenue
|
|
|
590
|
|
|
|
725
|
|
Accrued
liabilities
|
|
|
1,293
|
|
|
|
1,266
|
|
Total
current liabilities
|
|
|
2,987
|
|
|
|
2,719
|
|
Capital
lease obligations, less current portion
|
|
|
133
|
|
|
|
146
|
|
Other
long term liabilities
|
|
|
19
|
|
|
|
19
|
|
Total
liabilities
|
|
|
3,139
|
|
|
|
2,884
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock - $0.001 par value; 1,000,000 shares authorized;
none
issued and outstanding
|
|
|
–
|
|
|
|
–
|
|
Common
stock - $.001 par value; 20,000,000 shares authorized, 9,489,159 and
8,648,950 shares issued and outstanding, respectively
|
|
|
10
|
|
|
|
9
|
|
Additional
paid-in capital
|
|
|
31,121
|
|
|
|
28,908
|
|
Accumulated
deficit
|
|
|
(5,844
|
)
|
|
|
(6,060
|
)
|
Accumulated
other comprehensive income
|
|
|
(69
|
)
|
|
|
18
|
|
Total
stockholders’ equity
|
|
|
25,218
|
|
|
|
22,875
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
28,357
|
|
|
$
|
25,759
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Bridgeline
Software, Inc.
(Dollars
in thousands except per share data)
(unaudited)
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Web
development services
|
|
$
|
4,585
|
|
|
$
|
1,823
|
|
|
$
|
12,494
|
|
|
$
|
5,507
|
|
Managed
services
|
|
|
735
|
|
|
|
556
|
|
|
|
2,028
|
|
|
|
1,153
|
|
Product
license & subscription
|
|
|
380
|
|
|
|
90
|
|
|
|
779
|
|
|
|
341
|
|
Total
revenue
|
|
|
5,700
|
|
|
|
2,469
|
|
|
|
15,301
|
|
|
|
7,001
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Web
development services
|
|
|
2,408
|
|
|
|
1,010
|
|
|
|
6,444
|
|
|
|
3,005
|
|
Managed
services
|
|
|
183
|
|
|
|
133
|
|
|
|
549
|
|
|
|
279
|
|
Product
license & subscription
|
|
|
40
|
|
|
|
4
|
|
|
|
119
|
|
|
|
19
|
|
Total
cost of revenue
|
|
|
2,631
|
|
|
|
1,147
|
|
|
|
7,112
|
|
|
|
3,303
|
|
Gross
profit
|
|
|
3,069
|
|
|
|
1,322
|
|
|
|
8,189
|
|
|
|
3,698
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales & marketing
|
|
|
1,658
|
|
|
|
692
|
|
|
|
4,397
|
|
|
|
2,269
|
|
General & administrative
|
|
|
993
|
|
|
|
710
|
|
|
|
2,517
|
|
|
|
1,700
|
|
Depreciation & amortization
|
|
|
270
|
|
|
|
115
|
|
|
|
704
|
|
|
|
220
|
|
Research & development
|
|
|
108
|
|
|
|
206
|
|
|
|
406
|
|
|
|
552
|
|
Total
operating expenses
|
|
|
3,029
|
|
|
|
1,723
|
|
|
|
8,024
|
|
|
|
4,741
|
|
Income
(loss) from operations
|
|
|
40
|
|
|
|
(401
|
)
|
|
|
165
|
|
|
|
(1,043
|
)
|
Other
net income (expense)
|
|
|
28
|
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
Interest
income (expense)
|
|
|
(1
|
)
|
|
|
(190
|
)
|
|
|
37
|
|
|
|
(876
|
)
|
Income
(loss) before income taxes
|
|
|
67
|
|
|
|
(591
|
)
|
|
|
216
|
|
|
|
(1,919
|
)
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
67
|
|
|
$
|
(591
|
)
|
|
$
|
216
|
|
|
$
|
(1,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.14
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.45
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.14
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,489,159
|
|
|
|
4,282,928
|
|
|
|
9,139,356
|
|
|
|
4,277,714
|
|
Diluted
|
|
|
9,589,777
|
|
|
|
4,282,928
|
|
|
|
9,261,419
|
|
|
|
4,277,714
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Bridgeline
Software, Inc.
Consolidated
Statements of Cash
Flows
(Dollars
in thousands)
(unaudited)
|
|
Nine
Months Ended
June
30,
|
|
Cash
flows from operating activities:
|
|
2008
|
|
|
2007
|
|
Net
income (loss)
|
|
$
|
216
|
|
|
$
|
(1,919
|
)
|
Adjustments
to reconcile net income (loss) to net cash used
in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
395
|
|
|
|
159
|
|
Amortization
of intangible assets
|
|
|
429
|
|
|
|
87
|
|
Amortization
of debt discount and deferred financing fees
|
|
|
—
|
|
|
|
576
|
|
Stock
based compensation
|
|
|
340
|
|
|
|
264
|
|
Gain
on sale of assets
|
|
|
—
|
|
|
|
(1
|
)
|
Changes
in operating assets and liabilities, net of acquired assets
and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable and unbilled receivables
|
|
|
(525
|
)
|
|
|
(61
|
)
|
Prepaid
and other assets
|
|
|
(724
|
)
|
|
|
(677
|
)
|
Accounts
payable and accrued liabilities
|
|
|
2
|
|
|
|
936
|
|
Deferred
revenue
|
|
|
(630
|
)
|
|
|
233
|
|
Total
adjustments
|
|
|
(713
|
)
|
|
|
1,516
|
|
Net
cash used in operating activities
|
|
|
(497
|
)
|
|
|
(403
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired
|
|
|
(924
|
)
|
|
|
—
|
|
Proceeds
from sale of assets
|
|
|
—
|
|
|
|
16
|
|
Contingent acquisition payments
|
|
|
(731
|
)
|
|
|
(233
|
)
|
Equipment
and other asset expenditures
|
|
|
(618
|
)
|
|
|
(104
|
)
|
Net
cash used in investing activities
|
|
|
(2,273
|
)
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from financing agreement, net
|
|
|
—
|
|
|
|
106
|
|
Proceeds
from notes payable – shareholders
|
|
|
—
|
|
|
|
200
|
|
Proceeds
from exercise stock options and warrants
|
|
|
—
|
|
|
|
44
|
|
Principal
payments on capital leases
|
|
|
(172
|
)
|
|
|
(35
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(172
|
)
|
|
|
315
|
|
Effect
of exchange rates on cash
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(2,945
|
)
|
|
|
(409
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
5,219
|
|
|
|
591
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,274
|
|
|
$
|
182
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
47
|
|
|
$
|
305
|
|
|
|
|
|
|
|
|
|
|
Non
cash activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock for acquisitions
|
|
$
|
1,772
|
|
|
$
|
—
|
|
Issuance
of common stock for contingent acquisition payments
|
|
$
|
133
|
|
|
$
|
—
|
|
Purchase
of capital equipment through capital leases
|
|
$
|
70
|
|
|
$
|
63
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars
in thousands, except share and per share data)
1.
The Company and Summary of Significant Accounting Policies
Description
of Business
Bridgeline
Software, Inc. along with its wholly-owned subsidiary (collectively, “Bridgeline
Software” or the “Company”), is a developer of web application management
software and award winning web applications. Bridgeline Software’s web
application management software products, iAPPS, Base10, and Orgitecture, are
SaaS (software as a service) solutions that unify Content Management, Analytics,
eCommerce, and eMarketing capabilities. The Company’s in-house teams of
Microsoft®-certified developers specialize in web application development,
usability engineering, SharePoint development, search engine optimization, and
web application hosting management. Bridgeline Software’s software
and services assist customers in maximizing revenue, improve customer service
and loyalty, enhance employee knowledge, and reduce operational costs by
leveraging web based technologies.
Our
marketing and selling efforts focus on medium-sized business and large business.
These businesses are primarily in the following vertical
markets: Financial services, life sciences, high technology, media,
transportation, and foundations. As of June 30, 2008, the
Company has over 500 customers.
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.
Unaudited
Interim Financial Information
The
accompanying interim consolidated balance sheet as of June 30, 2008, the
consolidated statements of operations for the three and nine months ended June
30, 2008 and 2007, and the consolidated cash flows for the nine months ended
June 30, 2008 and 2007 are unaudited. The unaudited interim consolidated
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and in the opinion of the
Company’s management have been prepared on the same basis as the audited
consolidated financial statements as of and for the year ended September 30,
2007 and include all adjustments, consisting of normal recurring adjustments and
accruals, necessary for the fair presentation of the Company’s financial
position at June 30, 2008, its results of operations for the three and nine
months ended June 30, 2008 and 2007, and its cash flows for the nine months
ended June 30, 2008 and 2007. The results for the three and nine months ended
June 30, 2008 are not necessarily indicative of the results to be expected for
the year ending September 30, 2008.
Recent
Accounting Pronouncements
In June
2006, the Financial Accounting Standards Board (“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.
The adoption of FIN 48 did not materially impact the consolidated
financial statements.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars
in thousands, except share and per share data)
In
September 2006, the FASB issued Statement of Financial Accounting Standards 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
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 SFAS 141, Business Combinations (“SFAS 141”). 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.
In
February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2,
Effective Date of FASB
Statement No. 157
. (“FSP No.157-2”), which delays the effective date
of SFAS No. 157 for all non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the beginning of the
first quarter of fiscal 2009. The Company is currently evaluating the impact
that SFAS No. 157 will have on its consolidated financial statements when
it is applied to non-financial assets and non-financial liabilities that are not
measured at fair value on a recurring basis beginning in the first quarter of
2009. The major categories of non-financial assets and non-financial liabilities
that are measured at fair value, for which the company has not yet applied the
provisions of SFAS No. 157 are goodwill and intangible assets.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars
in thousands, except share and per share data)
In April
2008, the FASB issued FSP No. 142-3,
Determination of the Useful Life of
Intangible Assets
(“FSP 142-3”), which amends the factors that
should be considered in developing assumptions about renewal or extension used
in estimating the useful life of a recognized intangible asset under SFAS
No. 142,
Goodwill and
Other Intangible Assets
(“SFAS 142”). This
standard is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS No. 141R
and other accounting principles generally accepted in the United States. FSP
No.142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. The measurement provisions of this standard will
apply only to intangible assets of the Company acquired after January 1,
2009.
In May
2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(“SFAS No. 162”), which supersedes the
existing hierarchy contained in the U.S. auditing standards. The existing
hierarchy was carried over to SFAS No. 162 essentially unchanged. The
Statement becomes effective 60 days following the Securities and Exchange
Commission
’
s
approval of the Public Company Accounting Oversight Board amendments to the
auditing literature. The new hierarchy is not expected to change current
accounting practice in any area.
2.
Income per Share
Basic
income/(loss) per common share is computed by dividing net income or loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted income/(loss) per share is computed similarly to basic
income per 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. For purposes of this calculation, the Company has excluded
certain outstanding options, warrants and convertible debt from the calculation
of diluted weighted average shares outstanding because these were anti-dilutive.
The balance of these excluded equity instruments was 1,529,359 and
1,532,949 at June 30, 2008 and 2007, respectively.
3.
Goodwill and Intangible Assets
The
following table summarizes changes in the Company’s goodwill balances for the
nine months ended June 30, 2008:
|
|
June
30, 2008
|
|
Goodwill
balance at beginning of period
|
|
$
|
14,426
|
|
Acquisition
|
|
1,485
|
|
Contingent
acquisition payments earned
|
|
995
|
|
Other
net changes
|
|
66
|
|
Goodwill
balance at end of period
|
|
$
|
16,972
|
|
In
accordance with SFAS No. 142, the Company reviews goodwill balances for
indicators of impairment on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of goodwill below its carrying amount. There were no indicators of
impairment during the three and nine months ended June 30, 2008.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars
in thousands, except share and per share
data)
The
Company’s intangible assets are summarized as follows:
|
|
Useful
|
|
As
of June 30, 2008
|
|
|
|
Lives
in
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
|
|
Years
|
|
Asset
|
|
Amortization
|
|
Amount
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
Domain
and trade names
|
|
10
|
|
|
$
|
39
|
|
|
$
|
(17
|
)
|
|
$
|
22
|
|
Customer
related
|
|
5
|
|
|
|
2,216
|
|
|
|
(470
|
)
|
|
|
1,746
|
|
Non-compete
contracts
|
|
5
|
|
|
|
386
|
|
|
|
(194
|
)
|
|
|
192
|
|
Acquired
software
|
|
3
|
|
|
|
347
|
|
|
|
(130
|
)
|
|
|
217
|
|
Total
intangible assets
|
|
|
|
|
$
|
2,988
|
|
|
$
|
(811
|
)
|
|
$
|
2,177
|
|
Other
indefinite-lived intangible assets are tested for impairment annually and on an
interim basis if events or changes in circumstances between annual tests
indicate that the asset might be impaired in accordance with SFAS No. 142.
There were no indicators of impairment during any of the periods
presented.
4.
Stock Based Compensation
Stock-Based
Compensation
At June
30, 2008, the Company maintained two stock-based compensation
plans. The Company adopted SFAS No. 123R,
Share-Based Payments
(“SFAS
123R”) on October 1, 2006. Because it used the fair-value-based
method for disclosure under SFAS 123, it adopted SFAS 123R using the modified
prospective application. The Company granted the following stock
options during the three and nine months ended June 30, 2008:
|
|
|
|
|
Weighted
Average Per Share
|
|
|
|
|
|
|
Weighted
|
|
|
Estimated
|
|
|
Intrinsic
|
|
|
|
|
|
|
Average
|
|
|
Fair
Value of
|
|
|
Value
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Common
Stock
|
|
|
at
Grant
|
|
|
|
Granted
|
|
|
Prices
|
|
|
at
Grant Date
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2008
|
|
|
110,500
|
|
|
$
|
2.50
|
|
|
$
|
2.50
|
|
|
$
|
—
|
|
Nine
Months Ended June 30, 2008
|
|
|
453,300
|
|
|
$
|
3.35
|
|
|
$
|
3.35
|
|
|
$
|
—
|
|
The
following table illustrates the assumptions used by the Company to calculate the
compensation expense in accordance with SFAS 123R for stock options granted to
employees and directors:
|
|
|
|
|
|
|
|
|
|
Expected
Option
Life
in Years
|
|
|
|
Three
Months Ended June 30, 2008
|
|
$ 2.50
|
|
70.0%
|
|
2.72%
|
|
0%
|
|
5.0
|
|
$ 2.50
|
|
Nine
Months Ended
June
30, 2008
|
|
$2.50
- $3.69
|
|
54.0%
- 70.0%
|
|
2.72%
- 4.04%
|
|
0%
|
|
5.0
|
|
$
2.50 – $3.69
|
|
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars
in thousands, except share and per share data)
Price ranges of outstanding and
exercisable options as of June 30, 2008 are summarized below:
|
|
Outstanding Options
|
|
Exercisable Options
|
Exercise Price
|
|
Number
of Options
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Options
|
|
Weighted
Average
Exercise
Price
|
$
|
0.003
|
|
6,667
|
|
4.25
|
|
$
|
0.0030
|
|
6,667
|
|
$
|
0.0030
|
$
|
0.3573
|
|
3,219
|
|
3.66
|
|
0.3573
|
|
3,219
|
|
0.3573
|
$
|
1.0716
|
|
29,675
|
|
3.66
|
|
1.0716
|
|
29,675
|
|
1.0716
|
$
|
1.20
|
|
43,111
|
|
6.46
|
|
1.2000
|
|
43,111
|
|
1.2000
|
$
|
2.50
|
|
110,500
|
|
9.78
|
|
2.5000
|
|
−
|
|
2.5000
|
$
|
3.00
|
|
254,972
|
|
4.81
|
|
3.0000
|
|
−
|
|
3.0000
|
$
|
3.22
|
|
6,100
|
|
9.52
|
|
3.2200
|
|
−
|
|
3.2200
|
$
|
3.59
|
|
163,000
|
|
9.46
|
|
3.5900
|
|
−
|
|
3.5900
|
$
|
3.69
|
|
155,000
|
|
9.33
|
|
3.6900
|
|
−
|
|
3.6900
|
$
|
3.75
|
|
540,664
|
|
7.44
|
|
3.7500
|
|
−
|
|
3.7500
|
$
|
3.92
|
|
37,400
|
|
9.18
|
|
3.9200
|
|
−
|
|
3.9200
|
$
|
4.60
|
|
37,000
|
|
9.03
|
|
4.6000
|
|
−
|
|
4.6000
|
$
|
4.90
|
|
42,500
|
|
9.02
|
|
4.9000
|
|
−
|
|
4.9000
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,429,808
|
|
|
|
|
|
82,672
|
|
|
Stock
Option Activity
The
following table summarizes option activity for all of the Company’s stock
options:
|
Shares
Covered
by
Options
|
|
Exercise
Price per
Share
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Balance,
September 30, 2007
|
1,077,831
|
|
$0.003
to $4.90
|
|
$
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
453,300
|
|
2.50
to 3.69
|
|
3.35
|
|
|
|
|
|
Exercised
|
(6,667
|
)
|
0.003
|
|
0.003
|
|
|
|
|
|
Forfeited
|
(94,656
|
)
|
3.59
– 3.75
|
|
3.72
|
|
|
|
|
|
Balance,
June 30, 2008
|
1,429,808
|
|
$0.003
to $4.90
|
|
$ 3.40
|
|
7.60
|
|
$
|
149,024
|
|
Compensation
expense is generally recognized on a graded straight-line basis over the vesting
period of grants. As of June 30, 2008, the Company had approximately $630,000 of
unrecognized compensation costs related to share-based payments, which the
Company expects to recognize through fiscal 2011.
There
were no options exercised during the three month period ended June 30,
2008. The intrinsic value of options exercised during the nine month
period ended June 30, 2008 was $24,000.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars
in thousands, except share and per share
data)
5.
Acquisition
Acquisition
of Tenth Floor, Inc.
On
January 31, 2008, the Company acquired all the outstanding stock of Tenth Floor,
Inc. (“Tenth Floor”). Tenth Floor is a web application development
company that has developed its own SaaS-based web application management
software product named BASE-10. Tenth Floor is headquartered in Cleveland, Ohio
with a satellite office in Minneapolis, Minnesota. Bridgeline Software acquired
Tenth Floor for a total value of approximately $4 million, including the
purchase of approximately $650,000 of Tenth Floor net working capital (cash,
accounts receivable, less certain liabilities). This value consisted of $504,000
in cash, $96,000 of repayment of a bank line of credit, 640,000 shares of
Bridgeline Software common stock, and the opportunity to receive up to an
additional $1.2 million in cash over a 12 quarter period based on certain
minimum operating income goals being achieved. The Bridgeline Software common
stock issued is subject to a one (1) year lock-up agreement and was priced per
the agreement based on the average 90 day closing price.
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 preliminary and estimated
fair values of the net assets acquired:
Net
assets acquired:
|
|
|
|
Cash
|
|
$
|
20
|
|
Other
current assets
|
|
|
687
|
|
Equipment
|
|
|
125
|
|
Other
assets
|
|
|
121
|
|
Intangible
assets
|
|
|
1,090
|
|
Goodwill
|
|
|
1,438
|
|
Total
assets
|
|
|
3,481
|
|
Current
liabilities
|
|
|
661
|
|
Capital
lease obligations
|
|
|
104
|
|
Total
liabilities assumed
|
|
|
765
|
|
Net
assets acquired
|
|
$
|
2,716
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
paid
|
|
$
|
600
|
|
Equity
exchanged
|
|
|
1,772
|
|
Closing
costs and fees
|
|
|
344
|
|
Total
purchase price
|
|
$
|
2,716
|
|
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars
in thousands, except share and per share data)
The
Company completed a preliminary purchase price allocation. The Company has
engaged a valuation firm to complete the purchase price allocation and we expect
this valuation to be complete during the quarter ending September 30,
2008. The following unaudited pro forma information reflects the
results of operations of the Company as though the acquisition of Tenth Floor
was completed as of October 1, 2006:
|
|
Pro
Forma (Unaudited)
|
|
|
|
Nine
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,364
|
|
|
$
|
7,695
|
|
Net
income (loss)
|
|
$
|
109
|
|
|
$
|
(1,822
|
)
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.20
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.20
|
)
|
Number
of weighted average shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,354,229
|
|
|
|
8,923,817
|
|
Diluted
|
|
|
9,476,292
|
|
|
|
8,923,817
|
|
The
common stock used as consideration for the acquisition 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.
6.
Events Subsequent to June 30, 2008
Acquisition
of Indigio Group, Inc.
On July
1, 2008, the Company acquired all the outstanding stock of Indigio Group, Inc.
(“Indigio”), a Denver, Colorado-based company founded in
1998. Indigio is an award-wining web development company that
provides web application development, web design, usability, and search engine
optimization services to its customers. The acquisition of Indigio expands the
geographical presence of the Company consistent with its
strategy. Consideration for the acquisition of Indigio consisted of
(i) $600,000 in cash, (ii) 1,127,810 shares of Bridgeline Software common stock,
(iii) the payment of $195,000 of indebtedness owed by Indigio, and (iv) deferred
consideration of up to $2.1 million payable in cash quarterly over the 14
consecutive calendar quarters after the acquisition, contingent upon Indigio
achieving certain financial goals during such period. If the
contingent payments are made, the Company will account for the payments as
additional purchase price and will allocate it to goodwill.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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 risks 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 unaudited
consolidated financial statements and related notes prepared in accordance with
United States generally accepted accounting principles.
Overview
Bridgeline
Software, Inc. (“Bridgeline Software” or the “Company”) is a developer of web
application management software and award-winning web applications that help
organizations optimize business processes. Bridgeline Software’s
software and services assist customers in maximizing revenue, improve customer
service and loyalty, enhance employee knowledge, and reduce operational costs by
leveraging web based technologies.
Bridgeline
Software’s iAPPS
,
Base10,
and Orgitecture software products are 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 Software helps
customers cost-effectively accommodate the changing needs of today’s websites,
intranets, extranets, and mission-critical web applications.
iAPPS
®
and
Orgitecture are software products delivered through a SaaS business model, in
which we deliver our software over the Internet while providing maintenance,
daily technical operation and support. iAPPS
®
provides
a flexible architecture so perpetual licensing of the software is available as
well.
Over the
next 12 to 18 months, the Company plans to migrate its Base10 and Orgitecture
related customers to iAPPS.
Bridgeline
Software’s team of certified Microsoft developers specialize in end-to-end web
application development, information architecture, usability engineering,
SharePoint development, rich media development, search engine optimization, and
web application hosting management.
Our
marketing and selling efforts focus on medium-sized business and large business.
These businesses are primarily in the following vertical
markets: Financial services, life sciences, high technology, media,
transpiration, and foundations. At June 30, 2008, we have seven
geographic specific locations in the United States that have professional direct
sales management and delivery teams in each location. They are in the
Atlanta area, Boston area, Cleveland area, Chicago area, Minneapolis area, New
York area, and Washington DC area. Subsequent to June 30, 2008, we
expanded into our eighth geographic location in the Denver, Colorado area with
the acquisition of Indigio Group, Inc. on July 1, 2008.
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 sales and delivery teams are 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 additional dot net
development 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.
Results
of Operations
Three
months ended
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
$
|
|
|
Change
%
|
|
Total
revenue
|
|
$
|
5,700
|
|
|
$
|
2,469
|
|
|
$
|
3,231
|
|
|
|
131
|
%
|
Gross
profit
|
|
|
3,069
|
|
|
|
1,322
|
|
|
|
1,747
|
|
|
|
132
|
%
|
Income
(loss) from operations
|
|
|
40
|
|
|
|
(401
|
)
|
|
|
441
|
|
|
|
1103
|
%
|
Net
income (loss)
|
|
|
67
|
|
|
|
(591
|
)
|
|
|
658
|
|
|
|
982
|
%
|
EBITDA
|
|
$
|
566
|
|
|
$
|
(244
|
)
|
|
$
|
810
|
|
|
|
332
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
$
|
|
|
Change
%
|
|
Total
revenue
|
|
$
|
15,301
|
|
|
$
|
7,001
|
|
|
$
|
8,300
|
|
|
|
119
|
%
|
Gross
profit
|
|
|
8,189
|
|
|
|
3,698
|
|
|
|
4,491
|
|
|
|
121
|
%
|
Income
(loss) from operations
|
|
|
165
|
|
|
|
(1,043
|
)
|
|
|
1,208
|
|
|
|
732
|
%
|
Net
income (loss)
|
|
|
216
|
|
|
|
(1,919
|
)
|
|
|
2,135
|
|
|
|
988
|
%
|
EBITDA
|
|
$
|
1,427
|
|
|
$
|
(543
|
)
|
|
$
|
1,970
|
|
|
|
363
|
%
|
Revenue
Three
Months ended June 30
The
Company reported total revenues of $5.7 million for the three months ended June
30, 2008 versus total revenues of $2.5 million for the three months ended June
30, 2007, an increase of 131%.
More
specifically, web development services revenues were $4.6 million for the third
quarter of fiscal 2008 compared to $1.8 million for the third quarter of fiscal
2007, an increase of 152%. Managed services revenue were $735,000 for
the third quarter of fiscal 2008 compared to $556,000 for the third quarter of
fiscal 2007, an increase of 32%. Product licenses and subscription
revenues were $380,000 for the third quarter of fiscal 2008 compared to $90,000
for the third quarter of fiscal 2007, an increase of 322%. These
increases in revenues are substantially attributable to recently completed
acquisitions. Recently completed acquisitions include the
acquisitions of Objectware, Inc., Purple Monkey, Inc. and Tenth Floor,
Inc.
The
Company had a total of 539 customers on June 30, 2008 versus 138 customers on
June 30, 2007, an increase of 291%. Of the total customer base, 365
customers, or 68% of the Company’s customer base, pay a monthly subscription fee
or a monthly managed services fee. The revenue mix in managed
services continues to shift towards hosting and co-managed services and away
from on-site retained services revenues.
For the
three months ending June 30, 2008 the Company had two (2) customers that
individually represented greater than 5% of its total revenues, compared to the
three months ending June 30, 2007 where the Company had three (3) customers who
represented greater than 5% of total revenues.
Nine
months ended June 30
The
Company reported total revenues of $15.3 million for the nine months ended June
30, 2008 versus $7.0 million of total revenues for the nine months ended June
30, 2007, an increase of 119%.
Similar
to the three month revenues, revenue in all categories increased when compared
to the same period one year earlier. The current nine month period
increases are largely due to acquisitions completed since the similar period in
the prior year and the rollout of our next generation iAPPS solutions, net
of expected decreases in managed services revenues derived from one
significant customer as previously reported.
Gross
Profit
The
Company reported total gross profits of $3.1 million for the three months ended
June 30, 2008 versus $1.3 million of total gross profits for the three month
ended June 30, 2007, an increase of 132% over the same period last
year. As with the increase in revenue, the increase in gross profit
is substantially attributable to recently completed acquisitions and a shift in
the product mix to higher margin managed services. Gross profit
margins were consistent at 54% of sales in 2008 and the same period in
2007.
For the
nine month period ended June 30, 2008, the Company reported gross profits of
$8.2 million versus $3.7 million in the same period one year earlier, an
increase of 121%. The increase in gross profit is due to the same
factors noted above with respect to the increase in revenue for the nine months
period. Gross profit margins for the nine months ended June 30, 2008
were 54% compared to 53% for the same period in 2007. The combination
of increased pricing and increases in revenue from sources other than web
development services have contributed to the overall increased
margins.
Operating
Expenses
Three
Months ended June 30
For the
three month period ended June 30, 2008, sales and marketing expenses increased
$966,000, or 140%, when compared to same period in fiscal 2007. This
increase is substantially attributed to recent acquisitions which expanded our
sales force. For the third quarter of fiscal 2008, sales and marketing expenses
represented 29% of sales, which is consistent as compared to 28% in the same
period in fiscal 2007.
General
and administrative expenses increased $283,000, or 40%, when compared to the
same period in fiscal 2007. This increase is principally due an
increase in the number of full time non-billable employees, including eight (8)
who joined us as a result of acquisitions and three (3) who are new hires, as
well as increases in rent and other office related expenses due to our recently
completed acquisitions. As a percentage of sales, general and
administrative expenses have decreased to 17% compared to 29% in the same period
one year earlier. This improvement is consistent with our
expectations of our ability to leverage the existing general and administrative
infrastructure as acquisitions are completed and sales increase.
Research
and development investments for the three months ended June 30, 2008 decreased
when compared with levels in the third quarter of fiscal
2007. Expenses decreased $98,000, or 48%. This decrease is
largely attributable to the capitalization of $134,000 in iAPPS-related
development costs during the third quarter of fiscal 2008. In accordance with
accounting principles generally accepted in the United States, certain software
development costs may be capitalized once technological feasibility has been
reached. Capitalization of future costs will continue until the
related software is ready for sale, at which time we will begin amortizing the
capitalized costs. Had these costs not been capitalized, research and
development expenses would have increased $36,000, or 17% when compared to the
same period one year earlier.
Depreciation
and amortization expenses for the third quarter of 2008 were $270,000, verses
$115,000 in the same period in fiscal 2007, representing a 135%
increase. Depreciation expense and amortization expense increased
primarily due to increases in fixed assets and definite-lived intangible assets
associated with recent acquisitions, and, to a lesser extent, the timing of
purchases of property and equipment.
Nine
months ended June 30
For the
nine month period ended June 30, 2008, sales and marketing expenses increased
$2.1 million, or 94%, when compared to the same period one year
earlier. The increase is due to the same factors noted for the three
month period above. For the nine months ended June 30, 2008, sales
and marketing represented 29% of sales, compared to 32% in the same period one
year earlier. The improvement as a percentage of sales is largely due
to synergies realized through acquisitions.
General
and administrative expenses for the nine months ended June 30, 2008 increased
$817,000, or 48%, when compared to the same period one year
earlier. This increase is due to the same factors noted above for the
three month period. As a percentage of sales, general and
administrative expenses have decreased to 16% compared to 24% in the same period
one year earlier. This improvement is consistent with our
expectations of our ability to leverage the existing general and administrative
infrastructure as acquisitions are completed and sales increase
Research
and development investments for the nine months ended June 30, 2008 decreased
$146,000, or 26%, when compared to the same period one year
earlier. This decrease is largely attributable to the capitalization
of approximately $299,000 in cost during the nine month period in accordance
with accounting principles. Had these costs not been capitalized,
research and development expenses would have increased $153,000, or 28% when
compared to the same period one year earlier.
Depreciation
and amortization expenses for the nine months ended June 30, 2008 were $704,000,
versus $220,000 in same period in fiscal 2007, representing a 220%
increase. Depreciation expense and amortization expense increased
$236,000 and $248,000, respectively, due to increases in fixed assets and
definite-lived intangible assets. The increase in fixed assets is
attributable to the combination of purchases of property and equipment and
assets associated with recent acquisitions. The increase in
amortization is primarily attributable to the recently completed
acquisitions.
Income
from Operations
Income
from operations for the three months ended June 30, 2008 was $40,000 compared to
a loss in the prior year of $401,000, an improvement of
$441,000. This improvement is largely attributable to synergies
realized through our recent acquisitions and our ability to leverage our
existing infrastructure as revenues continue to grow. The ability to
leverage our existing infrastructure provides an ongoing opportunity to increase
operating margins and profits as we grow.
For the
nine months ended June 30, 2008, income from operations was $165,000 compared to
a loss in the prior year of $1.0 million, a $1.2 million
improvement. This improvement is due to the same factors noted above
for the three month period.
EBITDA
We also
measure our performance based on the level of earnings before interest, taxes,
depreciation, and amortization and before stock compensation expense (EBITDA
before stock compensation expense). For the three and nine months
ended June 30, 2008, we reported EBITDA before stock compensation expense of
$566,000 and $1.4 million, respectively, compared to an EBITDA loss of $244,000
and $543,000, respectively, in the same periods one year earlier. We
continue to be encouraged by the improvement in our fiscal 2008 results to date
and believe EBIDTA before stock compensation expense is an important measure for
management. We believe that this measure is an indicator of cash flow
being generated by our operations. The following table shows the
calculation of these amounts:
|
|
Three
Months
|
|
|
Nine
months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income (loss)
|
|
$
|
67
|
|
|
$
|
(591
|
)
|
|
$
|
216
|
|
|
$
|
(1,919
|
)
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
15
|
|
|
|
180
|
|
|
|
47
|
|
|
|
866
|
|
Depreciation
& amortization
|
|
|
336
|
|
|
|
79
|
|
|
|
829
|
|
|
|
246
|
|
Stock
Compensation
|
|
|
148
|
|
|
|
88
|
|
|
|
335
|
|
|
|
264
|
|
EBITDA
|
|
$
|
566
|
|
|
$
|
(244
|
)
|
|
$
|
1,427
|
|
|
$
|
(543
|
)
|
Liquidity
and Capital Resources
As of
June 30, 2008, the Company has cash and cash equivalents of $2,274,000 and
working capital of $4,395,000. During the third quarter of fiscal
2008, our operations used $575,000 in cash, compared to the use $106,000 in the
same period in fiscal 2007. The change year over year is largely
attributable to the increase in net income offset by changes in working
capital. As we continue to grow, working capital is expected to use
cash as our accounts receivables and unbilled receivables will increase at a
pace greater than current liabilities. In addition to the cash used
by operations, we used an additional $146,000 to fund capital expenditures and
$134,000 for costs for capitalized software during the three month period,
$291,000 in contingent acquisition payments and $68,000 to repay amounts under
capital leases.
For the
nine months ended June 30, 2008, our operations used $497,000 in cash, compared
to the use of $403,000 in the same period one year earlier. The
change year over year is largely attributable to the increase in net income
offset by changes in working capital. During the nine months, we used
$924,000 for the acquisition of Tenth Floor, $731,000 for contingent acquisition
payments, $172,000 to repay amounts under leases and $618,000 for capital
expenditures and costs for capitalized software.
Since the
fourth quarter of fiscal 2007, we have generated net income. Prior to
that, we incurred annual losses since commencement of operations in 2000 and
used a significant amount of cash to fund our operations since inception. As a
result, we had an accumulated deficit of approximately $6 million at June 30,
2008.
Capital
Resources and Liquidity Outlook
We
believe that cash requirements for capital expenditures and contingent
acquisition payments will be approximately $150,000 and $350,000, respectively,
for the remainder of fiscal 2008 if all operating metrics are achieved for the
contingent acquisition payments.
Inflation
Inflationary
increases can cause pressure on wages and the cost of benefits offered to
employees. We believe that the relatively moderate rates of inflation
in recent years 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.
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
Critical
Accounting Policies
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;
|
|
Revenue
recognition;
|
|
Accounting
for goodwill and other intangible assets; and
|
|
Accounting
for stock-based compensation.
|
Allowance for doubtful accounts.
We maintain an allowance for doubtful accounts which represents estimated
losses resulting from the inability, failure or refusal of our clients to make
required payments. We analyze historical percentages of uncollectible accounts
and changes in payment history when evaluating the adequacy of the allowance for
doubtful accounts. We use an internal collection effort, which may include our
sales and services groups as we deem appropriate. Although we believe that our
allowances are adequate, if the financial condition of our clients deteriorates,
resulting in an impairment of their ability to make payments, or if we
underestimate the allowances required, additional allowances may be necessary,
resulting in increased expense in the period in which such determination is
made.
Revenue Recognition.
Substantially all of our revenue is generated from three activities: Web
Development Services, Managed Services and Product Licenses and Subscriptions.
We enter into arrangements to sell services, software licenses or combinations
thereof. We recognize revenue in accordance with Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition in Financial
Statements
, Emerging Issues Task Force (“EITF”) 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
application development solutions that address specific customer needs in the
areas of information architecture, usability engineering, Web application
development, rich media development, and search engine optimization. Web
Development Services are sold either on a stand alone basis or, as described
below, in multiple element arrangements with Managed Services and/or our
licensed software products.
Revenue
from stand-alone Web Development Services is recognized when the services are
performed using the proportional performance model using a method based on cost
incurred in relation to total estimated cost at completion. Labor costs are the
most appropriate measure to allocate revenue among reporting periods, as they
are the primary input to the provision of our Web Development
Service. Fixed fee engagements are billed monthly or
upon the completion of milestones. For milestone based projects, since
milestone pricing is based on hourly costs and the duration of such engagements
is relatively short, this approach principally mirrors an output approach
under the proportional performance model for revenue recognition on such fixed
priced engagements.
Managed
Services
Managed
services primarily include on-going retained professional services and may also
include monthly hosting fees for the use of hardware and infrastructure,
generally at our network operating center. Managed Services are sold on a
stand-alone basis or, as described below, in multiple element arrangements with
Web Development Services (including training and implementation services) and
our licensed software products. Stand-alone on-going 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. These arrangements do not require formal customer acceptance
and do not grant any future right to labor hours contracted for but not
used.
Revenue
from Hosting services is incidental to our Web Development Services activities
and 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 our total revenues.
Product
Licenses and Subscriptions
As
described further below under
Multiple Element
Arrangements
, our licensed software products are generally sold with Web
Development Services and Managed Services.
We
recognize revenue from perpetual software licenses upon delivery of the software
provided as the related Web Development Services do not result in significant
customization or modification of the software and are not essential to its
functionality. The related post-contract customer support revenue is also
recognized upon delivery of the software since post contract customer support
(“PCS”) does not contain rights to unspecified upgrades, is included in the
price of the multiple element arrangement, and extends only for a period of one
year or less and the cost of providing the PCS is deemed to be
insignificant. Perpetual software license revenue and related PCS
represented approximately $126,000 and $196,000 of revenue for the three and
nine months ended June 30, 2008.
Subscriptions
include fixed term software and a related hosting arrangement (“Licensed
Subscription Agreements”). Licensed Subscription Agreements are accounted
for as separate units of accounting based on their respective value to the
customer on a stand-alone basis and are separately priced based either on vendor
specific objective evidence (“VSOE”) of fair value or on third party evidence of
fair value when VSOE of fair value is not available. The Licensed Subscription
Agreements and related hosting services are included in Subscription revenue and
recognized ratably over the term of their month to month subscription
agreements. 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. As such, the Licensed Subscription Agreements are considered a
single unit of accounting for purposes of recognizing revenue in the multiple
element arrangements described below.
Multiple
Element Arrangements
Web
Development Services and Managed Services are also provided as part of multiple
element arrangements that include licensed software, PCS, managed services
and/or a hosting arrangement. We account for these multiple elements separately
pursuant to SOP 97-2 or EITF 00-21, as applicable.
In
determining whether the Web Development Services element in a multiple element
arrangement can be accounted for separately from other elements, we consider the
availability of Web Development Services from other vendors and whether
objective and reliable evidence of fair value exists for the undelivered
elements. Web Development Services do not involve significant production,
modification, or customization of our licensed software products. The Web
Development Services are regularly sold on a stand-alone basis pursuant to a
price list and are not discounted. We have also concluded that the software
element in these multiple element arrangements is incidental to the Web
Development Services and is not essential to the functionality of the Web
Development Services. Except when provided as a part of our Licensed
Subscription Agreements described above, hosting services, if any, are accounted
for separately as Managed Services, as those services have value to the customer
on a stand-alone basis and are separately priced based on VSOE of fair value or
based on third party evidence of fair value if VSOE of fair value is not
available.
In
determining whether the Managed Services element of a multiple element
arrangement can be accounted for separately, we consider that Managed Services
have value to its customers on a stand-alone basis since those services are
regularly sold separately pursuant to standard price lists which are not
discounted. The hosting services are considered to have stand-alone value to the
customer and are separately priced based on third party evidence of fair
value.
In
accordance with EITF 00-21, we recognize revenue pursuant to multiple element
arrangements using the residual method whereby the value ascribed to the
delivered element (generally the Web Development Services) is equal to the total
consideration less the VSOE of fair value or third party evidence of fair value
of the undelivered elements.
Web
Development Services engagements are sometimes sold along with a perpetual
license for our software products. 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 such
arrangements in accordance with SOP 97-2 Following SOP 97-2, revenue is
recognized upon delivery of the perpetual license because the Web Services are
not essential to the functionality of the software and we have established VSOE
of fair value for the Web Services. Revenue from Web Development
Services is recognized when the services are performed using the proportional
performance model using a method based on cost incurred in relation to total
estimated cost at completion. Any related PCS revenue is 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.
Customer
Payment Terms
Our
payment terms with customers typically are “net 30 days from
invoice”. Payments terms may vary by customer and generally do not
exceed 45 days from invoice date. For Web Development Services, we
typically invoice project deposits of between 20% and 30% 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 June
30, 2008, we maintained two stock-based compensation plans. Effective
October 1, 2006, we adopted SFAS No. 123R,
Share-Based Payments
(“SFAS
123R”). Because we used the fair-value-based method for disclosure under
SFAS 123, we adopted SFAS 123R using the modified prospective
application. Under the modified prospective method, compensation expense
that we recognize 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. We have disclosed the pro forma effect of stock-based compensation
expenses pursuant to SFAS 123R in the financial statements and under the
modified prospective transition method, the results for prior periods will not
be restated.
We
estimate the fair value of options granted using the Black-Scholes-Merton option
valuation model (the “Model”) and the assumptions shown in the notes to our
financial statements. We estimate the expected term of options granted based on
the history of grants and exercises in our option database. We estimate the
volatility of our common stock at the date of grant based on the historical
volatility of comparable public companies consistent with SFAS 123R and
Securities and Exchange Commission Staff Accounting Bulletin No. 107,
Share Based Payment
. We base
the risk-free interest rate that we use in the Model on the implied yield in
effect at the time of option grant on U.S. Treasury zero-coupon issues with
equivalent remaining terms. For purposes of calculating the pro forma
compensation we have used our actual historical forfeiture rates of between
11% and 13% for all awards which we believe is a reasonable approximation of
expected future forfeitures. We have never paid any cash dividends on our common
stock and we do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero in the Model. We
amortize the fair value ratably over the vesting period of the awards, which is
typically three years. We may elect to use different assumptions under the Model
in the future or select a different option valuation model altogether, which
could materially affect our net income or loss and net income or loss per share
in the future.
As of
June 30, 2008, we had 1,429,808 options outstanding ranging in exercise prices
between $0.003 and $4.90.
Recent
Accounting Pronouncements
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.
The adoption of FIN 48 did 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
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
(“SFAS
141”). 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.
In
February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2,
Effective Date of FASB
Statement No. 157
(“FSP No.157-2”), which delays the effective date
of SFAS No. 157 for all non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the beginning of the
first quarter of fiscal 2009. The Company is currently evaluating the impact
that SFAS No. 157 will have on its consolidated financial statements when
it is applied to non-financial assets and non-financial liabilities that are not
measured at fair value on a recurring basis beginning in the first quarter of
2009. The major categories of non-financial assets and non-financial liabilities
that are measured at fair value, for which the company has not yet applied the
provisions of SFAS No. 157 are goodwill and intangible assets.
In April
2008, the FASB issued FSP No. 142-3,
Determination of the Useful Life of
Intangible Assets
(“FSP 142-3”) which amends the factors that should
be considered in developing assumptions about renewal or extension used in
estimating the useful life of a recognized intangible asset under SFAS
No. 142,
Goodwill and
Other Intangible Assets
(“SFAS 142”). This
standard is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS No. 141R
and other accounting principles generally accepted in the United States. FSP
No.142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. The measurement provisions of this standard will
apply only to intangible assets of the Company acquired after January 1,
2009.
In May
2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(“SFAS 162”) which
supersedes the existing hierarchy contained in the U.S. auditing standards. The
existing hierarchy was carried over to SFAS No. 162 essentially unchanged.
The Statement becomes effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board
amendments to the auditing literature. The new hierarchy is not expected to
change current accounting practice in any area.
Item 3.
Controls
and Procedures.
Evaluation
of disclosure controls and procedures.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our President and Chief Executive
Officer (Principal Executive Officer), our Executive Vice President and Chief
Financial Officer (Principal Financial Officer), and our Vice President of
Finance and Chief Accounting Officer (Principal Accounting Officer) as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, as ours are designed to do, and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
In
connection with their audit of our financial statements, our external auditors,
UHY LLP, advised us that they were concerned that during the years ended
September 30, 2007 and 2006, our accounting resources did not include enough
staff with the detailed knowledge, experience and training in the selection and
application of certain accounting principles
generally
accepted in the United States of America (GAAP) to meet our financial reporting
needs. This control deficiency contributed to material weaknesses in internal
control with respect to accounting for revenue recognition and equity. A
“material weakness” is a control deficiency or combination of control
deficiencies in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement in the financial statements
or related disclosures will not be prevented or detected on a timely
basis.
During
fiscal 2007, we created new positions in our Company, with specific
responsibilities for external financial reporting, internal control, revenue
recognition and purchase accounting. We filled all of these positions
during fiscal 2007. We believe that the addition of these
accounting professionals will address the material weaknesses noted
above. We estimate that the annual cost of the new positions referred
to above will be between $300,000 and $350,000. In addition, we
expect to incur additional costs in the future. While we expect to complete the
process of bringing our internal control documentation into compliance with the
Sarbanes-Oxley Act (SOX) Section 404 as quickly as possible, we cannot at this
time estimate how long it will take to complete the process or its ultimate
cost. We expect such costs to be
significant. During the fourth quarter of fiscal 2007, we commenced
the implementation of a new financial reporting system that is expected to
improve the reporting process by eliminating redundant
spreadsheets.
Changes
in internal controls.
There
were no changes in our internal controls over financial reporting during the
three and nine months ended June 30, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting. Subsequent to the end of the quarter, our Chief Accounting
Officer resigned to take a position with a large public reporting
company. We are in the process of recruiting to fill this position as
well as examining the current structure of our finance department given the
number of acquisitions completed over the last twelve months.
PART
II—OTHER INFORMATION
Item 1.
|
Legal
Proceedings.
|
From time
to time we may be involved in litigation relating to claims arising out of our
operations. We are not currently involved in any material legal
proceedings.
Item 2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
The
following summarizes all sales of our unregistered securities during the fiscal
quarter ended June 30, 2008. The securities in each of the below-referenced
transactions were (i) issued without registration and (ii) were
subject to restrictions under the Securities Act and the securities laws of
certain states, in reliance on the private offering exemptions contained in
Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on
Regulation D promulgated thereunder, and in reliance on similar exemptions
under applicable state laws as a transaction not involving a public offering.
Unless stated otherwise, no placement or underwriting fees were paid in
connection with these transactions. Proceeds from the sales of these securities
were used for general working capital purposes.
Options
During
the quarter ended June 30, 2008, we granted options to purchase shares of common
stock on the following dates in the amounts and at the per share exercise prices
set forth below:
Date
|
|
Number
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
April
8, 2008
|
|
|
110,500
|
|
|
$
|
2.50
|
|
The
securities were issued exclusively to our employees and consultants. The
issuance of options and the shares of common stock issuable upon the exercise of
such options as described above were issued pursuant to written compensatory
plans or arrangements with our employees, directors and consultants, in reliance
on the exemptions from the registration provisions of the Securities Act set
forth in Section 4(2) thereof relative to sales by an issuer not involving any
public offering, to the extent an exemption from such registration was
required.
Item 3.
|
Defaults
Upon Senior Securities.
|
Not
applicable.
Item 4.
|
Submission
of Matters to a Vote of Security
Holders.
|
(a) On
April 18, 2008, the Company held its Annual Meeting of
Shareholders.
(b) Not
Applicable
(c) At
such meeting, the shareholders of the Company voted:
(1)
|
To
elect two (2) Directors to serve for the ensuing year. The votes cast
were as follows:
|
|
|
Votes
For
|
|
|
Votes
Withheld
|
|
Robert
Hegarty
|
|
|
7,172,179
|
|
|
|
22,873
|
|
John
Cavalier
|
|
|
7,172,179
|
|
|
|
22,873
|
|
(2)
|
To
ratify the selection of UHY, LLP as the Company’s independent auditors for
the fiscal year ending September 30, 2008. The votes cast were as
follows:
|
Votes
For
|
|
|
Votes
Against
|
|
|
Abstained
|
|
|
Broker
Non-
Votes
|
7,186,051
|
|
|
2,390
|
|
|
6,611
|
|
|
0
|
(3)
|
To
approve the amendment to the Bridgeline Software, Inc. Amended and
Restated Stock Incentive Plan to increase the number of shares of Common
Stock available for issuance upon exercise of options granted under the
Plan from 1,400,000 shares to 2,000,000 shares. The votes cast were as
follows:
|
Votes
For
|
|
|
Votes Against
|
|
|
Abstained
|
|
|
Broker Non-
Votes
|
4,544,345
|
|
|
883,924
|
|
|
7,611
|
|
|
1,759,172
|
(d)
Not Applicable
Item 5.
|
Other
Information.
|
Not
applicable.
Exhibit No.
|
|
Description
of Document
|
10.1
|
|
Agreement
and Plan of Merger, dated as of July 1, 2008, by and among Bridgeline
Software, Inc., Indigio Group, Inc., Timothy Higgins, Michael Higgins,
Jeff D. Higgins, William Sedgwick, Sage Realty Group, LLC, Michael Mark,
Lawrence O. Brown, Bryan Schutjer, Richard Ganley, Timothy Watson, Micah
Baldwin, Michael Roy, Christine Spencer, Michael Merkulovich, James
Nelson, Jaime Pabon, George Kassabgi and James Conrad. (filed an Exhibit
2.1 to the Company’s Current Report on Form 8-K dated July 2, 2008 and
incorporated herein by reference)
|
|
|
|
10.2
|
|
Employment
Agreement with Timothy Higgins. (filed an Exhibit 2.2 to the Company’s
Current Report on Form 8-K dated July 2, 2008 and incorporated herein by
reference)
|
|
|
|
31.1
|
|
CEO
Certification required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
|
|
31.2
|
|
CFO
Certification required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
|
|
32.1
|
|
CEO
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section
1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
§1350).
|
|
|
|
32.2
|
|
CFO
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section
1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
§1350).
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
Bridgeline
Software, Inc.
|
|
|
(Registrant)
|
|
|
|
|
|
|
August
14, 2008
|
|
/s/ Thomas
L. Massie
|
Date
|
|
Thomas
L. Massie
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
August
14, 2008
|
|
/s/ Gary
M. Cebula
|
Date
|
|
Gary
M. Cebula
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
|
|
INDEX
OF EXHIBITS
Exhibit No.
|
|
Description
of Document
|
|
|
|
10.1
|
|
Agreement
and Plan of Merger, dated as of July 1, 2008, by and among Bridgeline
Software, Inc., Indigio Group, Inc., Timothy Higgins, Michael Higgins,
Jeff D. Higgins, William Sedgwick, Sage Realty Group, LLC, Michael Mark,
Lawrence O. Brown, Bryan Schutjer, Richard Ganley, Timothy Watson, Micah
Baldwin, Michael Roy, Christine Spencer, Michael Merkulovich, James
Nelson, Jaime Pabon, George Kassabgi and James Conrad. (filed an Exhibit
2.1 to the Company’s Current Report on Form 8-K dated July 2, 2008 and
incorporated herein by reference)
|
|
|
|
10.2
|
|
Employment
Agreement with Timothy Higgins. (filed an Exhibit 2.2 to the Company’s
Current Report on Form 8-K dated July 2, 2008 and incorporated herein by
reference)
|
|
|
|
31.1
|
|
CEO
Certification required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
|
|
31.2
|
|
CFO
Certification required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
|
|
32.1
|
|
CEO
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section
1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
§1350).
|
|
|
|
32.2
|
|
CFO
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section
1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
§1350).
|
|
|
|
|
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